"When you buy a share, you buy a small ownership stake in a real company. If the company earns more money, your stake is worth more. That is it. Every other complexity in stock investing is a variation on this one idea."
For educational purposes only. Nothing in this chapter is financial advice. All figures are illustrative examples. Tax rules, account types, contribution limits, and regulations differ by country and change over time. Always verify current rules with official government sources or a qualified financial adviser before making any investment decisions.
What Is a Share?
A share is a unit of ownership in a company. When a company wants to raise money, it divides itself into millions of equal pieces and sells those pieces to the public. Each piece is a share. You buy one, you own a tiny fraction of that company.
This is not abstract. If you own 100 shares of a company that has 10 million shares outstanding, you own 0.001% of it. You are entitled to 0.001% of its profits if they pay a dividend. If the company is acquired, you get 0.001% of the sale price. If it goes bankrupt, you lose your investment.
Shares are also called stocks, equities, or common stock. These words are used interchangeably. They all mean the same thing: a slice of ownership in a real business.
How You Make Money from Shares
There are exactly two ways to make money owning shares. Everything else is a variation of one of these.
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Capital Growth
The share price rises. You sell for more than you paid. The difference is your profit. Example: buy at £10, sell at £17 — profit of £7 per share. No cash is received until you sell.
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Dividends
The company distributes a portion of its profits to shareholders. Paid quarterly (US) or semi-annually (UK). You receive cash without selling. Example: £0.40 per share per year on a £10 share = 4% dividend yield.
Most large, established companies pay dividends — banks, utilities, consumer staples. Most fast-growing tech companies pay no dividend — they reinvest all profits back into growth. Both approaches can produce strong returns; they just do it differently.
Why Share Prices Move
In the short term, share prices move because people change their minds about what a company is worth. In the long term, prices follow earnings. These two things are related but often lag each other by months or years.
What moves share prices
Earnings results
Company reports profits higher or lower than expected. This is the single biggest short-term mover.
Earnings guidance
Management says next quarter looks better or worse. Markets price in the future, not the past.
Interest rates
When rates rise, future profits are worth less today. Growth stocks fall more than value stocks.
Macro news
Inflation data, jobs reports, GDP — affects the whole market, not individual companies.
Sector news
A regulatory change or new technology affects an entire industry simultaneously.
Market sentiment
Fear and greed move prices independently of fundamentals — especially in the short term.
The price at any moment reflects the collective guess of every buyer and seller about what the company will earn in the future, discounted back to today's money. When that guess changes, the price changes.
Market Capitalisation
Market cap = share price × total number of shares. It is the market's current valuation of the entire company.
Market cap categories (approximate)
Mega-cap
Over £150bn
Apple, Microsoft, Shell — the largest companies in the world. Most stable, most liquid.
Large-cap
£10bn – £150bn
FTSE 100 companies. Established, dividend-paying, widely analysed.
Mid-cap
£2bn – £10bn
FTSE 250. Growing companies with more volatility and less analyst coverage.
Small-cap
Under £2bn
Higher growth potential, higher risk, lower liquidity. Research is harder.
The Risk of Individual Stocks
Owning shares in a single company is fundamentally different from owning a diversified fund. When you own one company, you are exposed to everything that can go wrong with that company — not just the market.
⚠️ Risks specific to individual stocks
- Business risk — the company's model stops working (Kodak, Blockbuster, Nokia)
- Management risk — a bad CEO can destroy a good business
- Fraud risk — accounting fraud can wipe out shareholders overnight (Enron, Wirecard)
- Concentration risk — one bad earnings call can drop the price 20-30% in a day
- Liquidity risk — smaller companies may be hard to sell quickly at a fair price
An index fund holding 500 companies eliminates most of these risks through diversification. This is why most financial research shows that most individual stock pickers underperform a simple index fund over 10+ years — including professional fund managers.
Questions People Actually Ask
What is the difference between a share and a stock?
Nothing meaningful. "Stock" is the American English term. "Share" is the British English term. Both refer to a unit of ownership in a company. You will hear both used interchangeably, even in the same country.
Can I lose more than I invest in shares?
No — not with regular shares purchased outright. The maximum you can lose is 100% of what you paid. The company can go to zero, but your losses are capped at your initial investment. This is different from leveraged products or short selling, where losses can exceed your investment.
How do I know what a share is worth?
You can never know with certainty. The price is always a market estimate of future earnings. Common valuation metrics include the P/E ratio (price divided by annual earnings per share), which tells you how many years of current earnings you are paying for. A P/E of 20 means you are paying 20 years of current earnings. Whether that is cheap or expensive depends on the company's growth rate.
Do I need to buy whole shares?
No. Many brokers now offer fractional shares — you can invest any amount (e.g. £50) and own a fraction of a share. This is especially useful for high-price stocks like Amazon or Alphabet, where a single share costs thousands of pounds.
What is a dividend yield?
Dividend yield = annual dividend per share ÷ current share price × 100. If a share trades at £20 and pays £1 per year in dividends, the yield is 5%. A high yield is not always good — it can indicate the market expects the dividend to be cut, or that the share price has fallen sharply.
How often do share prices update?
During market hours, prices update continuously as trades execute. Outside market hours, the last traded price is shown. Pre-market and after-hours prices exist on US markets but with much lower volume and wider spreads.
What happens to my shares if my broker goes bust?
Your shares are held separately from the broker's own assets — they are yours, not the broker's. In the UK, the FSCS protects up to £85,000 of investment assets if the broker firm itself fails. In the US, SIPC protects up to $500,000. The protection is against broker failure, not against falls in share value.
Is buying individual stocks better than a fund?
For most people, no. Decades of data show that most individual investors — and most professional fund managers — underperform a simple low-cost index fund over 10+ years. Individual stocks can outperform, but they require significantly more research, carry higher risk, and most people's time is worth more than the potential outperformance.
Key Takeaways
- A share is a unit of ownership in a company — you own a fraction of its assets, earnings, and future.
- You make money two ways: the price rises (capital growth) or the company pays profits to shareholders (dividends).
- Share prices reflect collective expectations about future earnings — short-term moves are often noise, long-term moves follow fundamentals.
- Individual stocks carry business, management, and fraud risk that diversified funds eliminate.
- Most investors — including professionals — underperform a simple index fund over 10+ years. This is not an argument against owning stocks; it is an argument for owning many of them at once.