Shares or stocks may not be a very new term to you since we usually have them mentioned in the media daily when reporting daily performances. However of concern here is what they are, how they are actually traded, and the guys involved in the trade, where they are traded and why they are traded anyway…
Today let’s start with what shares or stocks actually are. Probably you may be thinking of shares as some commodities bought and sold at a profit like any other goods in the market. That way, you won’t be very far from the real fact though you won’t still be very near.
But a summary of all opinions is that; shares or stocks are a section of ownership in a company. Getting confused? Please don’t.
Think of it this way; there is this big shamba (land) back in your village that is lying idle and it is owned by one person. The owner then decides to divide it into small plots for sale to any willing and able buyer; say 100 plots. When you buy one or two plots in that big shamba, what do you become? Obviously you are now one among the many co-owners of that shamba.
Once you have bought those plots and now being a legal owner, you can then choose to do two things:
- Either sell the plots later when their values appreciate and the prices go up, or
- Rent them out and be getting regular incomes from them in terms of rental income.
The same case applies to the shares or stocks. When you are buying shares of a given company, you are actually buying a section of ownership in that whole company.
The company as a whole has its total capital amount required to enable it carry out its operations. The owner of the company not being able to raise the whole amount alone; then decides to divide this amount into small equal amounts that can be bought by many people each according to the amount of money they have.
These small equal amounts of capital that are now on offer to anyone to buy and be part of the co-owners of the company are what we call the shares. When you buy these shares in blocks, they are then referred to as stocks.
When you go buying shares of the company, you are therefore buying a part of its capital which then makes you part of the many co-owners, just as in our shamba case above.
Once you have bought the shares or stocks of a company, you can then choose to either:
- Sell them at a profit whenever their value goes up and thus pushing their prices up, or
- Hold them and be paid a dividend by the company at the end of each financial year.
That is it; you now know what shares or stocks are. Next time we look at what the above two choices involve, and introduce the actual trading of shares.