A Beginner’s Guide to Stocks and Shares

Stocks and shares are fundamental elements of investing. This brief guide will introduce you to what stocks and shares are, how the stock market functions, and other essential details to get you started.

What Are Stocks and Shares?

Shares represent fractional ownership in a company. When you purchase shares, you essentially buy a piece of the company. If the company’s value increases, so does the value of your shares.

For example, if Company ABC divides its ownership into 500 million shares and you own 500 of them, you hold a 0.0001% stake in the company.

The value of a company is indicated by its share price. This price tells you how much it costs to buy one share. To determine the company’s total value, or market capitalization, you multiply the share price by the total number of outstanding shares:

Share Price x Outstanding Shares = Market Cap

For instance, if Company ABC’s share price is £4.60 and it has 500 million shares, its market cap would be £2.3 billion.

You can view real-time share prices for thousands of companies using City Index’s free trading simulator, which provides £10,000 in virtual funds for practice.

Why Do Companies Issue Shares?

Companies issue shares primarily to raise capital. This funding supports growth and development. Alternatives to issuing shares include borrowing from banks or issuing corporate bonds, but these options have their downsides:

• Loans: Must be repaid with interest, which can reduce profitability.
• Selling Equity: Selling large portions of ownership can lead to loss of control over the company.

By issuing shares, companies can raise significant capital without incurring debt, while maintaining control over their business. However, the decision to go public can also involve challenges, and some companies, like Aldi and IKEA, choose to remain private.

How Does the Stock Market Function?

Here’s a quick overview of how the stock market operates:

Stock Exchanges:
Stock exchanges are platforms where shares are bought and sold. Major exchanges include the New York Stock Exchange (NYSE), NASDAQ, London Stock Exchange (LSE), and Frankfurt Stock Exchange (FSE). Companies typically list their shares on one primary exchange but may also have secondary listings.

Initial Public Offerings (IPOs):
An IPO is the process through which a company offers its shares to the public for the first time. This process can be complex and involves meeting strict exchange requirements. Once listed, the company’s shares are available for trading, and their initial value is determined by market demand.

Stockbrokers:
Retail investors often use stockbrokers to buy and sell shares. Stockbrokers handle transactions on your behalf. There are different types of brokers, such as discretionary brokers who manage your investments and execution-only brokers who follow your instructions. You can also trade shares indirectly through derivatives like CFDs or spread betting, which do not require direct ownership of the shares.

Why Do People Buy Shares?

Investors typically purchase shares with the expectation that the company’s value will increase. For example, if you believe that Company XYZ has a promising future, you might buy its shares, anticipating that the company’s success will drive up the share price. When the price rises, you can sell your shares for a profit.

Additionally, some shares offer dividends, which are a portion of a company’s profits distributed to shareholders. Not all stocks pay dividends, but those that do can provide a steady income stream.

Types of Shares

Beyond regular shares, several other types exist:

• Preference Shares: Offer special dividend rights and typically provide priority over ordinary shares.
• Share Options: Grant the right to buy or sell shares at a predetermined price before a specific date.
• Advisory Shares: Given to advisors as compensation, often in lieu of cash.
• Bearer Shares: Unregistered shares that are owned by whoever holds the physical certificate.
• Class A Shares: May offer more voting rights compared to Class B shares but are not always available to the public.
• Fractional Shares: Portions of a share, often resulting from stock splits.

Getting Started with Share Trading

To start trading shares, you can open an account with City Index. For beginners, using a demo account can be a risk-free way to practice trading. A demo account provides access to real-time market data with virtual funds, allowing you to learn and strategize without financial risk. Once ready, you can transition to a live account where you manage your own funds and potential profits or losses.

This guide covers the essentials of stocks and shares. Whether you’re looking to invest or trade, understanding these basics will help you navigate the stock market more effectively.