Understanding Stocks and Shares

Stocks, shares and equities are all words used to describe what is essentially the same thing.

When you buy a share, you are buying ownership of part of a company and you become a shareholder in that company. You are investing your money in that company by buying an equity stake. The value of your share can change and, as an investor, your objective is to sell your share for a higher price than you paid for it.

Shares in companies are commonly bought and sold on a financial market, such as a stock exchange. Some companies’ shares are traded on more than one, such as the London or New York stock exchanges. Every company with shares that are traded on an exchange has a unique identifier, called an Epic code, which is typically an abbreviation of the company’s name.

Buying Shares

You buy shares via an intermediary such as an online investing service, which acts as a broker between you and the stock exchanges. You place orders online or by telephone to buy, on your behalf, the number of shares you want. You’ll also need to state your preferred order types; these include market orders, limit orders and stop-loss orders. Your online investing service does not at any point own the shares you ask to buy – you do. An online investing service is simply an intermediary authorised to buy and sell equities on behalf of clients like you. Naturally, they also charge a fee for their services.

The value of your shares can rise and fall over time. A share’s performance, and the corresponding value of your investment, will depend on the actions of the company whose shares you own and general market sentiment. If you own shares in a firm that is performing poorly, the value of your shares may fall. If it is performing well, its share value may rise. Many other factors can have an impact on share price. So, for example, a poorly performing company could see its shares rise if the market believes another company is about to sell it.

Market indices

You can monitor the performance of your shares, and their historic performance and dividend history, by tracking the relevant Epic codes.

You can also use stock market indices to monitor the performance of the equities market. The FTSE 100 or Dow Jones Industrial Average are the main market indices for the London and New York stock exchanges, respectively. An index can provide you with useful trend information; so if the FTSE 100 is rising, it is an indication that the value of shares traded on the London Stock Exchange may also rise.

The company whose share you have bought may decide to offer more shares to a stock market. When a company first decides to sell its shares on a financial market, it is known as an Initial Public Offering (IPO), or ‘flotation’. As well as issuing more shares, a company may also decide to split its shares, or take other corporate actions that may affect the value of your shares.

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