What are stocks, shares and equities?

What are stocks, shares and equities?

Stocks, shares and equities are terms used to describe units of ownership in one or more companies. The owner – known as a shareholder – will receive dividend payments, as well as voting rights, if the company grants them.¹ The terms are often used interchangeably, but there are some technical differences between stocks, shares and equities that can cause confusion.

• ‘Stocks’ is generally used to refer to portions of ownership of multiple companies – for example, you could say that you own stock in Amazon and Microsoft
• ‘Shares’ usually refers to units of ownership in a specific company – for example, you could say that you own ten Amazon shares
• ‘Equity’ is the term for a total ownership stake in the company – for example, if a company had 10,000 shares, and you owned 1000 of them, you could say that you held a 10% equity stake in that company

How do stocks, shares and equities work?

Stocks, shares and equities work by giving you direct exposure to a company’s performance. Shares will rise in value when the company is doing well, and they will fall in value when the company is doing poorly.

Stock exchanges facilitate the exchange of shares in publicly listed companies. There are a few ways for a company to go public, but the more traditional and most common is for the company to hold an initial public offering (IPO).

How to buy shares: investing or trading

Investing in shares

When you invest in shares, you’ll be taking direct ownership.¹ Investing is favoured by people that are looking to take a long-term position with the expectation that the company’s shares will appreciate in value. That’s because if a company grows and becomes more valuable, it’s likely that the value of its shares will also rise.

Being a shareholder in this case means that you can stand to profit if you sell your shares for a higher price than the price at which you bought them. But, because investments can rise or fall in value, you can also receive back less than you initially invested if the company share price falls, and you close your position.

Trading shares

Trading shares means that you’re speculating on share price movements without taking direct ownership. Trading is usually favoured by people who are looking to take a short-term position on a company’s share price – perhaps during periods of increased volatility or market activity.

When you trade, you’ll be able to ‘buy’ (go long) to speculate on prices rising; as well as ‘sell’ (go short) to speculate on prices falling. You can trade with derivatives like CFDs – which are leveraged.

This means that you only need to commit a deposit – known as margin – to receive full market exposure. But, remember that leverage can increase both your profits and your losses.

Learn how to trade share CFDs

Why do companies list on the stock market?

Companies list on the stock market to raise capital by selling their shares to institutional or retail investors. Institutional investors means entities like investment funds or banks, while retail investors means everyday people.

Most companies will list on a domestic exchange. For example, in Australia, most shares are listed on the Australian Securities Exchange (ASX). That said, it’s becoming increasingly common for companies to have multiple listings to take advantage of foreign direct investment.

How many shares can a company have?

The minimum number of shares that a company can issue is one – this could be the case when there is only one owner of the entire company. However, there is no universal maximum for how many shares a company will issue, so this can vary from company to company.

The number of available shares can also change over time as companies issue more shares or buy back shares from investors.

How much is a share worth?

Different shares are worth different amounts of money. A share’s value will vary depending on whether you’re looking at its fair value or its market value. The fair value is the intrinsic value of shares based on the company’s fundamentals, while the market value is the amount that individuals are currently willing to pay for the shares.

The fair value of shares is often much lower than the market value as the latter is heavily influenced by demand, which does not always reflect the company’s fundamentals. If the demand for a share goes up while the supply remains constant, then the share price will rise as people are willing to pay more.

Why buy or trade shares?

People buy and trade shares as a way to gain exposure to global economic health and growth, and to individual companies. Your decision about whether to invest in shares or trade on their price will depend on whether you want long-term or short-term exposure.

Why buy shares outright?¹

Investors buy shares outright in the hopes of generating long-term returns. Generally speaking, investing in the stock market can yield better returns than leaving your money in a bank account.

Investing in stocks only gives investors the option to go long on a company’s shares – meaning that you would generally only profit if the shares increase in value. But, there is the potential to receive dividend payments even if the company’s share price is falling – and you can choose to receive the returns from these dividends as income, or to reinvest the returns to benefit from compounding interest.

Dividends can either be taken as additional income, or reinvested into more shares or funds in order to create compound dividend returns.

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Why trade share CFDs?

Trading shares with derivative products enables you to go short as well as long – giving you the potential to profit from markets that are falling in price as well as rising. This is because you don’t need to own the underlying shares to trade with derivatives.

When you trade shares via leveraged products such as CFDs, you’ll only need to put down a deposit – known as margin – to receive full market exposure. This is a huge draw to trading shares, as it means less money is required upfront. But, while leverage has significant benefits, it also comes with risks because any profit or loss is calculated from the full exposure of the position, not just the margin required to open it.

What are the risks of buying or trading shares?

Risks of buying shares outright

The main risk involved in buying shares is if the company you choose to invest in gets into difficulty and goes bankrupt, or if its share price falls to zero. If this happened, you would lose your initial outlay – however with share trading, this is always the most you stand to lose. For example, if you invested $1000, the most you could lose if the share price fell to $0 is $1000.

For investors, the risk of a short-term decline in share prices can be offset by hedging their investments with short positions using leveraged derivatives. Investors can also diversify their holdings by investing in or speculating on the price of exchange traded funds (ETFs) – these are baskets of stocks that track the performance of more than one company at once.

Risks of trading shares on leverage

The risks posed by trading share CFDs are significantly different due to leverage. When you trade on margin, both your profits and losses are calculated on the full value of your position, rather than this initial outlay. This means that although you have the possibility of magnifying your profits, you also could magnify your losses.

However, there are tools that traders can use to manage this risk. For example, stop-losses enable traders to define their exit point for trades that move against them, while limit orders will close a trade after the market moves by a certain amount in a trader’s favour.

Also, if you decide to short a share – either traditionally via a broker or with derivative products – you would be open to an unlimited downside potential. As, in theory, there is no limit to how much the share price could rise by.