Introduction to the Financial Markets

6 Lessons
6 Hours

Introduction to Shares

Welcome to Introduction to Shares! In this video, you will learn why companies issue shares, why people invest in shares, and the workings of the stock exchange (also referred to as stock market) including what indices are and what bull and bear markets are.

Why Companies Issue Shares

In order to start a new company or expand an existing one, you need capital. Companies use various sources for that capital. They can either (1) have owners use their own money, (2) have the company borrow money from a bank or from other people, or (3) have the company issue and sell shares to investors. The advantage of raising capital through shares is that you don't have to pay back the money or pay interest to the investors. Instead, shareholders are entitled to a share of the profits of the company.

Why People Invest in Shares

People invest in shares with the objective of generating wealth. A share, also known as stock or equity, is the smallest unit of ownership in a company. If you own a share of a company’s stock, you are a part owner of the company.

Studies have proved that shares (or equities) are one of the best long-term investments. They tend to offer investors better returns than government bonds, corporate bonds, property, and many other types of investment. As a shareholder, you have the right to vote for who will run the company, and other important matters like selling the company.

By becoming an owner of the company, you get a share of the profits this company makes – This is what is known as a dividend. If the company is profitable, the price of its shares will rise, and you will make a profit on your investment – this is known as capital gain.

The Stock Market

The stock market or stock exchange is simply the place where shares are traded (i.e. bought and sold). Shares of listed companies like Apple and IBM are traded in a stock exchange like the New York Stock Exchange. Exchanges used to be physical locations where dealers meet in person, but modern markets are switching to online trading. Although most stocks are traded through an exchange, trading can also take place off exchanges or over-the-counter via CFDs.

Indices

Stock market indices summarize the performance of major groups of stocks. It is calculated by finding an average price from the prices of the stocks within the group.

For example, The Dow Jones 30 Index is calculated using the closing prices of 30 of the biggest companies in the US stock exchange. The UK100 is the average of 100 shares in the UK exchange, Nikkei 225 is derived from 225 shares in Japan, and so on. It represents the general performance of the market; and can be traded as a whole instead of buying each individual share in the group.

The Bull and Bear Market

The stock market represents a constant battle between buyers and sellers and reflects positive or negative price movements. If a company is profitable at the moment and is expected to make more profits in the future, the price of its share will rise. A bull market is a market where majority of its shares or indices are experiencing a rise in prices.

If a company is not profitable at the moment, and is not expected to make future profits, its share price will drop. A bear market is a market where majority of its shares or indices are experiencing a fall or drop in prices.

Recap!

Capital

Money needed to start or expand a company

Share or stock or equity

The smallest unit of ownership in a company. When you own a share of a company, you are a part-owner.

Dividend

The share part-owners get from profits of the company.

Capital gain

Profit part-owners get off their investment in company shares. Part-owners get this when companies are profitable or are experiencing a rise in share price.

Stock market or stock exchange

The place where shares (or stocks or equities) are traded.

Indices

The summary of the performance of major groups of stocks (or shares or equities). (e.g. the Dow Jones 30 Index, UK100, Nikkei 225)

Bear market

A market where majority of its shares or indices are experiencing a drop or fall in prices.

Bull market

A market where majority of its shares or indices are experiencing a rise in prices.

In our next video, we will talk about CFDs. Thank you for watching!