When you buy equity (or stock), you are taking ownership of a small part of a particular company. If that company increases in value, the value of your equity also increases. Equity is bought and sold in the form of shares.
Share trading example
ABC Limited is a privately owned company that is currently worth £10,000,000. The owners want to raise some money so that they can expand the business overseas.
To do this, they sell a portion of the business by issuing stock at £2 per share. This means ABC becomes publically listed (so is called ABC plc). You decide it looks like shrewd investment so you buy £10,000 worth of stock. At £2 per share that gives you 5000 shares, or a 0.1% stake in the company.
Your investment turns out to be a good one. By the time ABC releases its first annual earnings report, its share price has risen to £3 and your investment has grown to a value of £15,000. You can now either sell your shares, or hold onto them in the hope of future profits.
However, share prices can go down as well as up and if ABC plc had gone down in value you could have lost money. For that reason, it is incredibly important to research both the company you are thinking of investing in and their wider industry before you buy any shares.
What are dividends?
Dividends are the share of a company’s profits that get paid out to shareholders. Using dividends, you can make money from shares without having to buy and then sell them for profit.
Dividends are usually paid by a business out twice a year. How much you get is dependent on how much profit the business makes, how much they have agreed to distribute to shareholders, and how many shares you own.
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