What are stocks, shares and equities?
Shares – also known as stocks or equities – are one of the most well-known financial instruments. Discover what they are and how they work, before looking at the benefits and risks of buying stocks.
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 receive dividend payments, as well as voting rights, if the company grants them.
The terms are often used interchangeably, but there are some technical differences between stocks, shares and equities that can cause confusion.
- ‘Stocks’ is generally used to refer to portions of ownership of multiple companies – for example, you could say that you own stock in Amazon and Microsoft
- ‘Shares’ usually refers to units of ownership in a specific company – for example, you could say that you own ten Amazon shares
- ‘Equity’ is the term for a total ownership stake in the company – for example, if a company had 10,000 shares, and you owned 1000 of them, you could say that you held a 10% equity stake in that company
How do stocks, shares and equities work?
Stocks, shares and equities work by giving you direct exposure to a company’s performance. Shares will rise in value when the company is doing well, and they’ll fall in value when the company is doing poorly.
Stock exchanges facilitate the exchange of shares in publicly listed companies. There are a few ways for a company to go public, but the more traditional and most common is for the company to hold an initial public offering (IPO).
How to buy shares: investing or trading
Investing in shares
When you invest in shares, you’ll be taking direct ownership. Investing is favoured by people that are looking to take a long-term position with the expectation that the company’s shares will appreciate in value. That’s because if a company grows and becomes more valuable, it’s likely that the value of its shares will also rise.
Being a shareholder in this case means that you can stand to profit if you sell your shares for a higher price than the price at which you bought them. But, because investments can rise or fall in value, you can also receive back less than you initially invested if the company share price falls, and you close your position.
Trading shares means that you’re speculating on share price movements without taking direct ownership. Trading is usually favored by people who are looking to take a short-term position on a company’s share price – perhaps during periods of increased volatility or market activity.
When you trade, you’ll be able to ‘buy’ (go long) to speculate on prices rising; as well as ‘sell’ (go short) to speculate on prices falling. You can trade with derivatives like spread bets and CFDS – which are leveraged. This means that you only need to commit a deposit – known as margin – to receive full market exposure. But, remember that leverage can increase both your profits and your losses.
Why do companies list on the stock market?
Companies list on the stock market to raise capital by by selling their shares to institutional or retail investors. Institutional investors means entities like investment funds or banks, while retail investors means everyday people.
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). That said, it’s becoming increasingly common for companies to have multiple listings to take advantage of foreign direct investment.
How many shares can a company have?
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?
Different shares are worth different amounts of money. A share’s value will vary depending on whether you’re 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 or trade shares?
People buy and trade shares as a way to gain exposure to global economic health and growth, as well as an individual company. Your decision about whether to invest in shares or trade on their price will depend on whether you want long-term or short-term exposure.
Why buy shares outright?
Investors buy shares outright in the hopes of generating long-term returns. Generally speaking, investing in the stock market can yield better returns than leaving your money in a bank account. Over the past 100 years, UK equities have generated average returns of 5% a year over and above inflation.
Investing in stocks only gives investors the option to go long on a company’s stock – meaning that you’d generally only profit if the shares increase in value. But, there is the potential to receive dividend payments even if the company’s share price is falling – and you can choose to receive the returns from these dividends as income, or to reinvest the returns to benefit from compounding interest.
Ready to start investing in shares?
Why trade shares?
Trading shares with derivative products enables you to go short as well as long – giving you the potential to profit from markets that are falling in price as well as rising. This is because you don’t need to own the underlying shares to trade with derivatives.
When you trade stocks via leveraged derivatives like spread bets or CFDs, you’ll only need to put down a deposit – known as margin – to receive full market exposure. This is a huge draw to trading shares, as it means less money is required upfront. But, while leverage has significant benefits, it also comes with risks because any profit or loss is calculated from the full exposure of the position, not just the margin required to open it.
What are the risks of buying or trading stocks?
Risks of buying stocks outright
The main risk involved in buying stocks outright is that the company gets into difficulty and goes bankrupt, or that the share price falls to zero. If this happened, you would lose your initial outlay – however with investing, this is always the most you stand to lose. For example, if you’d invested £1000, the most you could ever lose if the share price fell to £0 is £1000.
For investors, the risk of a short-term decline in share prices can be offset by hedging their stock investments with short positions using leveraged derivatives. Investors can also diversify their holdings by investing in or speculating on the price of exchange traded funds (ETFs) – these are baskets of stocks that track the performance of more than one company at once.
Risks of trading stocks
The risks of trading stocks are significantly different due to leverage – which can increase both your profits and your losses. That’s because your profit or loss will be calculated using the full value of your position, rather than the margin required to open it.
But, there are tools that traders can use to manage their risk. For example, stop-losses enable you to define your exit points for trades that move against you, while limit orders will close a trade after the market moves by a certain amount in your favour.
How to buy or trade stocks
How to buy shares outright
Here’s how to buy shares outright, as well as how to sell a shares investment:
Selling a share investment
- Log in to your share dealing account and go to our platform
- Search for the company's name
- Select 'sell' in the deal ticket
- Enter the number of shares you want to sell
- Confirm the sale
How to trade shares
Here’s how to take a long (‘buy’) position or a short (‘sell’) position with derivatives like spread bets or CFDs:
How can I start trading shares?
You can start trading shares in minutes when you create a trading account for spread bets or CFDs with us. if you’re not ready to trade the live markets yet, you can always practise in a risk-free environment with our demo account. You’ll get £10,000 in virtual funds for free to help you build your confidence.
Do shareholders get paid?
Yes, although it is by no means a guaranteed income. There are two methods by which shareholders can be paid: dividends and share price appreciation.
Dividends are the cash distribution of any company profits, given to shareholders periodically depending on how many shares they currently own.
The income received from share price appreciation can only be retrieved once a position has been closed. The amount received will depend on how much the price has changed between the time at which the position is entered and when it is exited.
What are the types of shares?
There are two types of shares that can be listed on an exchange: common and preferred. Common stock grants voting rights at shareholders’ meetings and dividend payments. Preferred stock generally does not come with voting rights, but the shareholders will have a better claim to earnings than common stockholders.