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 also have the right to part of the company’s earnings if a dividend payment is made, as well as voting rights.

The terms are often used interchangeably in finance, but there are some technical differences between them that can cause confusion. Equity is the term for a total ownership stake in the company after the repayment of any debt, while a share or stock describes a single unit of ownership. The plural term shares usually refers to units of ownership in a specific company, while equities and stocks are terms generally used to refer to portions of ownership multiple companies.

The weight of a shareholder’s vote and the number of dividends they receive will depend on the number of shares issued by a company and what portion of this they own. For example, if a company has 10,000 shares in circulation, and an individual was holding 1000 shares, they could be said to have a 10% stake in the company.

Why do companies list on the stock market?

The primary reason that companies list their stock is in order to raise capital by tapping into the public equity market by selling their shares to individual investors and institutions. This is an alternate method to gaining capital privately via venture capitalists.

Most companies will list on a domestic exchange. For example, in the UK, most shares are listed on the London Stock Exchange (LSE) or Alternative Investment Market (AIM). However, it is becoming increasingly common for companies to have multiple listings to take advantage of foreign investment.

How many shares are there in a company?

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 stock or buy back shares from investors.

How much is a share worth?

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

The fair value of a stock is often much lower than the market value as the latter is heavily influenced by demand, which does not always reflect a share’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 shares outright?

Investors buy shares as they are deemed a more successful – albeit riskier – way of generating long-term returns than cash ownership. Over the past 100 years, UK equities have generated average returns of 4.99% a year over and above inflation, meaning that the real value of an investment would have doubled every 13 years.¹ So, if you expected inflation to be 2.5% on an ongoing basis, you might expect your returns to be 4.99% more than this – so approximately 7.5%.

Investing in stocks only gives investors the option to go long on a company’s stock – meaning that you would generally only profit if the shares rise in value and that they would lose if they declined in value. However, there is the potential to receive dividend payments even if the company’s share price is falling.

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 shares?

Trading shares via derivative products is becoming increasingly popular because it enables individuals to go short as well as long – giving you the potential to profit from markets that fall in price, not just those that rise. This is because there is no requirement to own the underlying asset.

When you trade stocks via leveraged products such as CFDs and spread bets, you’ll only need to put down a fraction of the required capital, known as margin. This is a huge draw to trading shares, as it means less money is required upfront to gain a full market exposure. While leverage has significant benefits, it also comes with risks.

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How to trade shares

To speculate on the price of an underlying share, you can use derivative products such as CFDs and spread bets. Before you start to trade shares, it is important to understand both the benefits of using these products, and the risks associated with them.

Once you feel you have a grasp on how CFDs and spread bets work, you can start to trade shares by opening a live account with IG. Alternatively, you could open a demo account to practise trading shares in a risk-free environment first.