What are shares? How are they traded?

So, what are shares? The best way I can think of to explain it is a public company is made up of many shares, by owning at least one of them, you own a share of the company.

Another way of looking at it is to think of a loaf of sliced bread. Each slice represents share of the loaf. Just like each share of a company an investor owns represents a share of a company.

Shareholders

Investors who own shares in a company are called shareholders. The more shares a shareholder holds, the bigger stake in the company they have.

Why do businesses sell shares?

The main reason is money. Very often businesses need additional funds to expand. As lending to businesses can be risky, obtaining a bank loan to fund expansion isn’t always possible. As a result businesses often resort to selling a stake in their business in order to obtain the money they need.

Public and private

When I think of shares, I usually think of stocks that are listed on a stock exchange, like the New York Stock Exchange (NYSE). Companies that are listed on a stock exchange as known as public companies. The shares in public companies are freely traded on the open market and almost everybody has access to buy or sell them.

Most small businesses are not listed on the stock exchanges, so buying shares in them is not an option to everyone. These are known as private companies.

When a private company needs funding they often sell shares to private investors and venture capital firms.

Have you ever seen the TV program dragons den? It’s one of my favorite programs on TV. Owners of private companies pitch their share offer to a panel of wealthy self made businessmen.