What is a Share (or 'Stock')?

It is what it says it is — a share in a company. If you buy a company's stock, you own part of the company. Maybe only a very small piece, but a piece nonetheless. You have become one of the company's owners.

Companies issue shares to raise cash, i.e., 'capital' without creating debt; they have expansion plans, plans they believe will make them a lot of money, and so they go to the market to raise the money; they go public. The attraction of owning a share is that if the company is successful the share price will rise, making you money. The company may also pay a dividend as well. More money!

Each publicly listed company trades its share on one of the markets. The main market for the UK is the London Stock Exchange, LSE, which lists its companies in a number of categories depending on their overall size. Large multinational corporations will be listed in the FTSE 100, mid-caps will be on the FTSE 250 and the smaller companies will be on the AIM — the Alternative Investment Market.

The US has a number of large markets of which the largest are the NYSE, and the NASDAQ. The large mega-corporations will be listed on the NYSE, e.g., Disney and Coca-Cola, while newer high technology companies like Microsoft and Intel are listed on the NASDAQ. The largest companies in the US constitute the DOW JONES — this is an index, i.e., an aggregate of the thirty largest companies in the US. The value of the Dow — the Dow Jones Industrial Average — is used to gauge the performance of the US economy as a whole, and is thus seen as a very important number. A similar situation holds for Europe, where the equivalents would be XETRA, Frankfurt, Paris, Milan, the CAC 40, the DAX 30 and the EURO STOXX 50.

In recent years the stock markets have become greatly more interlinked; it is likely that this process will continue to the stage where there is only really one market, but perhaps with several branch offices. This further stresses the need for the investor to think globally, when thinking about the stock market.

One thing to point out is that an index is calculated based on some set of constituents, whereas a share price is attached to an individual company only. We shall not stress the difference between an index and a share price, as when trading it makes little difference; indices can be traded very similarly to shares. The attraction of trading on indices is that, since it is an average of a kind, it should not be so subject to the kind of violent movements that an individual share price can make — at least in relative terms.

Owning stock is traditionally a good way to invest. If the share price goes up, you have made money. Of course, sometimes it will go down. The supporters of investing in shares are often quick to point out that — on average — the profits made from investing in the stock market are much better than bonds (another type of investment), gold, or the Post Office savings account.

A share is also sometimes called an equity. More confusion, I know — but it is important to be conversant with the financial jargon.