In short
- A share is a unit of ownership in a company; its price reflects what investors expect the business to earn.
- Shares trade on regulated exchanges such as the NYSE, Nasdaq and London Stock Exchange during set hours.
- Returns come from price changes and dividends; losses come from the same place.
- Diversified, long-term investing and short-term trading are very different activities with different risks.
What a share is
When a company wants to raise money without borrowing, it can sell ownership in itself, divided into shares. Each share gives its holder a small claim on the company's profits and usually a vote on certain decisions. If the business grows and earns more, the shares tend to become more valuable. If it struggles, they fall, and in bankruptcy shareholders are last in line to be repaid.
Primary and secondary markets
Shares are first sold to investors in an initial public offering (IPO), where the money goes to the company. After that, they trade between investors on the secondary market, which is what people usually mean by the stock market. When you buy a share on an exchange, you buy it from another investor, not from the company.
Exchanges and how prices are set
Stock exchanges run central order books. Buyers post the prices they are willing to pay, sellers post the prices they will accept, and trades happen where the two meet. The largest exchanges by value are in the US (the New York Stock Exchange and Nasdaq), followed by exchanges in China, Japan, Europe and India. Each has set trading hours; the main US session runs from 9:30 to 16:00 New York time.
A share price moves when the balance of buyers and sellers shifts. News about earnings, interest rates, the economy or the company's industry changes what investors are willing to pay.
How investors make and lose money
- Capital gains or losses: the difference between what you pay and what you sell for.
- Dividends: some companies pay part of their profits to shareholders, often quarterly. Dividends are never guaranteed and can be cut.
Over long periods, broad stock markets have historically risen, but with deep falls along the way. The US market lost more than half its value between 2007 and 2009. Anyone investing in stocks needs to be able to sit through declines like that.
Indices: measuring the market
An index tracks a group of shares to show how a market is doing. The S&P 500 follows 500 large US companies; the FTSE 100 follows the largest companies on the London Stock Exchange. Index funds and ETFs let investors buy a whole index in one transaction, which spreads risk across many companies.
Order types
| Order | What it does | Main risk |
|---|---|---|
| Market order | Buys or sells immediately at the best available price | The price you get may differ from the last price you saw |
| Limit order | Buys or sells only at your price or better | It may never be filled |
| Stop order | Becomes a market order once a trigger price is reached | In a fast fall, it can fill well below the trigger |
Investing versus trading
These words are often used interchangeably, but they describe different activities:
- Investing usually means buying and holding a diversified set of shares or funds for years, relying on the long-term growth of businesses.
- Trading means trying to profit from shorter-term price moves, often using CFDs or other leveraged products.
Trading involves more decisions, more costs and, with leverage, more risk. Our risk management guide applies to both, but is essential for trading.
Costs to understand
Buying shares can involve commissions, the spread between buy and sell prices, currency conversion fees for foreign shares, account fees and, for funds, annual management charges. Small percentages compound over time. Trading fees explained breaks these down.
Protecting yourself
Use a broker authorised by your country's regulator. In many countries, investor compensation schemes protect your holdings up to a limit if a regulated broker fails, but not if your investments simply fall in value. Be wary of anyone promising guaranteed returns or urging you to act quickly: see how to spot investment scams.
Frequently asked questions
How do beginners start investing in stocks?
Most beginners open an account with a regulated broker and start with a diversified fund such as a broad index ETF, investing money they will not need for several years. Learning how fees and risk work comes before picking individual companies.
Can a stock go to zero?
Yes. If a company fails, its shares can become worthless. Holding many companies, for example through an index fund, reduces the damage any single failure can do.
What is the difference between a stock and a share?
In everyday use they mean the same thing. Strictly, 'stock' often refers to ownership in companies generally, while 'shares' are the individual units.
Sources
- U.S. SEC Investor.gov: Stocks