What is a share? Hello and welcome to my short little guide to take you through what a share is. Or as it is also sometimes known by, stocks.
Quick history of shares
Shares first started being issued back in Roman times. The Roman government decided to contract out services to private companies. These companies issued shares that were called particulae. Many Roman citizens invested in these companies.
On December 31st 1600 the English East India company was issued an English royal charter by Elizabeth I. This charted effectively gave the company a 15 year monopoly on all trade in India. In 1602 the Dutch East India Company issued shares on the Amsterdam Stock Exchange. This exchange allowed companies to attract capital from investors, to allow the company to expand. The Dutch East India Company went on to become the first multinational corporation, and the first megacorporation.
The invention of joint ownership accounted for much of Europes growth after the Dark Ages. Before the creation of joint stock corporations, expensive ventures such as building trading ships could only be undertaken by governments or very rich individuals.
A shareholder is an individual or a company that owns at least one share in a joint stock company. Shareholders can be granted special privileges depending on the stock that they hold. These rights could be, the right to vote on election of new board members, the right to have a share in distribution of dividends, the right to company assets if the company is liquidated.
The largest shareholders in a company tend to be mutual funds, and Exchange Traded Funds.
There are various ways of buying shares in a company. The most common way is through a stockbroker. Stockbrokers arrange the transfer of the stock from a seller to a buyer. There are a few different types of stockbroker. A full service broker tends to charge more per trade but may also offer investment advice. Whereas a discount broker provides less expensive trades but with little to no advice.
Another way of buying shares is directly from the company itself. This way is more rare and more for larger investors, companies may also offer a Direct Public Offering. These are where a company offers shares in itself without the aid of broker.
Selling stocks works in the same way as buying them, just in the opposite direction. When you sell there is usually a transaction fee that is charged by the broker performing the trade. The size of the fee depends on the type of broker used. After the sale completes the money is transferred to the seller. In some countries the government will charge Capital Gains Tax on on any gains over cost price.
The value of the stock fluctuates due to supply and demand. When demand is strong for a stock its price will rise until people find it too expensive. Inversely when people sell shares the supply of the increases and the price falls. A stocks price may be influenced by analysts forecasts for the company or the sector that the company is in.
A stock may also be influenced by pump and dump schemes that some people do to shares. That is where a person buys a lot of shares in a short amount of time which increases the price of the share. Other people see this upward trend of the share price and also buy into the stock. Once the shoe price reaches a certain points the person who initiated the pump sells all his shares to make a profit.