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 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).
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 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 Hong Kong, most shares are listed on the Hong Kong Stock Exchange (HKEX). 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 trade shares?
People trade shares as a way to gain exposure to global economic health and growth, as well as an individual company. Your decision about whether you want to speculate on the future value of the asset without taking ownership of it. This is commonly used for more short-term strategies.
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 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 trading stocks?
The risks of trading stocks are significantly different to buying, 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 trade stocks
How can I start trading shares?
It is really simple to apply for a CFD trading account 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 $20,000 in virtual funds for free to help you build your confidence.