What are stocks and shares?

The stock market is one of the most recognisable and talked about areas of financial trading. Each day billions of dollars are exchanged by traders, buying and selling shares of individual companies on the stock market.

What exactly are shares (also often referred to as "stocks") and what exactly is the stock market?

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yBanana and Uncle’s apples have not been listed on any stock exchange yet, but we have 10,000+ stocks of the largest world companies, like Google, Apple and Tesla!


Shares are a unit of ownership in a company

A share is a unit of ownership in a company

If you buy a share of a company, you have bought a unit of ownership of that company. This is why companies that allow people to buy their shares are referred to as public companies – they are owned, in part, by the public.

If you own just one share of a public company, you are a shareholder of that company. The more shares of a company you have, the higher the percentage of the company you own.

People buy and sell shares to make a profit

The main reason that anyone will buy a share of a company is to make money. They believe they will either get a return from dividend payments – part of the company's profit made to the shareholder by the company – or that the demand for the shares they buy will increase and they will be able to sell them at a later date for a profit.

If the demand for the shares of a company increases, then the price of those shares also increases.

Dividends go up

There are multiple reasons why the demand for shares goes up, however, to illustrate this, let's use a simple example.

Due to the fact that buying shares can give the owner benefits, such as dividend payouts, there is a certain amount of demand for them.

If the company is very healthy and increases its profit, then the dividend payout is likely to go up. More people will want to buy those shares, which means that the price of those shares will also increase. This is just one scenario in which the demand for a company's shares will go up.

Does it make sense to buy and sell shares?

Buying and selling stocks and shares is riskier than holding cash in a savings account. Over the long term however, it tends to produce much better returns.

Compared with typical annual returns of 3% for a savings account, or 5% for a high-interest savings account, you could make profit of as much as 50% per year through trading shares in a single company - if you stock pick correctly. That said, you also face the risk of a similar sized loss.

Shares in general do however tend to outperform both cash and fixed-income products like bonds. Simply buying the FTSE 100 index of large UK-listed stocks could earn you 5% to 15% a year if held over the long term.

You could also achieve this by investing in a well diversified portfolio. Read the Intro to portfolio building to find out how.

Trading shares

Traders will try to determine whether the demand for those shares will increase in the future, so they can buy them at a low price and sell them for a higher price.

Through a mechanism call short selling – selling share without actually owning them – traders will also try and sell shares in the anticipation that they will decrease in value, in order to buy them back at a lower price.

Analysis

The methods that people use to judge whether the shares of a company will go up or down in value are numerous.

For example, traders will look at the financial statements of a company, the products that the company is developing, possible growth prospects, the current business environment, as well as price charts – anything to determine whether the demand, and hence the price, will increase or decrease.

Shares are bought at the stock market through brokers

An individual cannot buy shares directly from someone or directly from a company (there are special circumstances where you can purchase shares directly, but we will focus on trading in the stock market for the purpose of this lesson).

People have to go to a stock market to buy and sell shares and access to the market is provided via a broker.

A reliable European broker with access to 25+ world markets is at your disposal!


Short term trading vs long term trading

Traders will open long or short positions and can hold these positions for any time span they wish. Some traders prefer short term trading, holding trades for a few minutes and some prefer holding trades for longer periods.

Time frame short term

Short term traders

Traders who are focused on short term horizons are likely to focus on technical analysis to take advantage of short term price movement. The long term prospects of a company are much less relevant because the trader is not looking to hold a trade for longer than a day, a few hours or even a few minutes.

This is not to say that the fundamentals of a company are completely ignored, because there are certain news announcements that can change the price of a share and short term traders can take advantage of this.

Time frame long term

Longer term trading

Traders that hold positions for a longer term focus more on the fundamentals of a company to see if a price movement is likely to continue. A price movement will continue if the demand for those shares is sustained and so those looking to hold on to shares for a while will look at the longer term prospects of the company.

Technical analysis is not abandoned when trading on a longer time frame – a price chart can show good points to buy and sell. Predominantly, however, they rely on the fundamental analysis of a company to determine whether they are going to trade the shares of a particular company in the first place.

The next lesson will go more in-depth into the different ways you can trade shares.

Summary

In this lesson you have learned that...

  • ... a share is a unit of ownership in a company. If you buy stock, you buy a small part of that company.
  • ... traders buy stocks because they believe the value will go up and they can sell them for a profit at a later time. They can also short sell a share if they believe the price will go down.
  • ... there are many different ways to determine whether a share will go up, such as financial statements, products in development, growth prospects and price charts.
  • ... different traders will prefer holding open positions for different lengths of time.
  • ... those that prefer short term horizons will generally pay more attention to technical analysis, but will still look to take advantage of the price changes caused by news releases.
  • ... traders that prefer a longer time horizon will look more at the fundamentals of a company and less attention to shorter term charting patterns.
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  • am interested in trading online business this is my main focus area ,thanks
  • are you talking to me ?
  • Hi muga1234
    some of the largest online businesses, such as google, yahoo and zynga are listed publicly and can be traded.
    A demo account with one of pour partner brokers is a great way to get started.
    Have a great day!
    Moritz
  • Hi,
    What are the requirements for a company to enter a specific stock exchange?

    All the best,
    Behebouser
  • Hi there Behebouser,

    Different exchanges will have different requirements when it comes to entering an exchange depending on the region they are in.

    The requirements of each exchange will differ but generally there will be criteria such as:
    -The number of shares issued over a given period
    -Earnings over a given period
    -Market Capitalisation
    -Transparent accounting for a given period(Usually minimum of three years)

    The rules for listing vary is there any particular one you were looking for the requirements on?

    Jack
  • I am looking into the LSE, but between LSE, Bourse of Paris and the FSE, wich is the best to trade in terms of liquidity and volatility?

    I know if I open an account with the currency in pounds I would just trade in the LSE, but if i open an account in euros can I trade in both Bourse of Paris and the FSE simultaneously?

    All the best,
    behebouser
  • HI there behebouser,

    The liquidity of each product will vary. Exchanges such as LSE are obviously ones which have a number of products traded on them however, it is not the exchange that denotes liquidity as such.

    In terms of stocks with highest liquidity the following are the ones to bear in mind:
    S&P500
    NASDAQ
    DAX
    FTSE
    EUROSTOXX 50

    It does depend on the sort of volatility you are also looking for.

    The S&P and EUROSTOXX are considered less volatile than the DAX and FTSE so for a beginner many will look at these indices for trading opportunities because liquidty is high.
  • I just want to say thanks to author of this fantastic video at the beginning of this article. Very clear explanation, just as much information as beginner needs and very, very fun.

    P.S. I watched it 3 timers in a row.
  • Hi brendza!

    Thanks for the feedback, we are glad you like the video! For more of the same why not check out the video section and have a look at some of the other coontent on the site smile
  • Hi Jack!

    Thanks for your answer. I'll visit video section as soon as I finish watching this video over and over again. smile
  • Go... Go... Go Friend...
  • am interested in trading online business this is my main focus area ,thanks
  • am interested in trading online business this is my main focus area ,thanks
  • can i use fractals to also trade stocks? how will i integrate it looking the company releases and economic releases that impact them.

    thanks
  • Hi smavis,

    balancing fundamentals a technicals.... that is a very complex question and cannot be answered briefly. Why don't you attend one of our stock coachings and consult with the expert directly?

    I am sure you'll find it useful!
    H
  • Wow, that was way more entertaining than the intro to Forex video, lol! I can't trade Forex in Alberta, Canada so it's time to learn Stock trading.
  • Navrark:
    Wow, that was way more entertaining than the intro to Forex video, lol! I can't trade Forex in Alberta, Canada so it's time to learn Stock trading.

    Yeah we had a lot of fun with that on in the office. The credit for the humor and story line goes to our video producer Jose who produced the script. I remember in the first time I watched it in the iteration process literally laughing out loud at my desk!

    Glad you liked it.
  • Thanks all to share your knowledge. It will be more informative site to develop my career in financial sector. I need to clear understand for FRACTAL
  • hi i'am hasan murni and i will enjoy join here

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