Introduction to financial markets
Shares are literally just that – a share in a company. Owning shares mean that you own a piece of that company and as such, you are entitled to your share of the company's earnings as well as any voting rights attached to the stock.
Companies sell shares because they want to raise money, possibly to expand their business further. They can do this by taking out a loan or issuing bonds, or by selling part of the company - this is known as “issuing stock”.
Shareholders hope that after buying stock in that company, the company’s performance will improve and the shares will be worth more in the future. Because shares provide their owners with a share in a company, they are also referred to as equities, or the equity market. This is to differentiate them from bonds, which are also issued by companies, but do not provide equity
An Initial Public Offering (IPO) is when a company’s stock is first issued. Markets often get excited by initial public offerings, or IPOs. This represents the first time a stock is listed on the market. Shares are sold initially via subscription, where investors can apply for shares. After that, they can be bought and sold on the stock market as usual on a stock exchange.
Shares can be bought or sold on a stock exchange, via a broker. Well known stock exchanges include the Singapore Stock Exchange (SGX), New York Stock Exchange (NYSE), London Stock Exchange (LSE) and NASDAQ.
Did you know? Not all big companies are listed on a stock exchange, and there are some very large ones, and famous household brands, that are still privately owned. In addition, some bigger companies only list a portion of their shares on the stock exchange, while rest is kept in private hands or owned by governments. The listed portion is called the free float.
Shares pay out dividends to their owners. This is usually done on a regular basis – e.g. quarterly. It represents a share of the company’s profits being paid back to its ultimate owners, the shareholders. Companies are not obliged to pay dividends, but many do so on a regular basis, which means their stock is also prized because of its income characteristics.
The life of a big company is not a smooth one, and there are a number of important events that affect the price of their shares, which traders/investors need to be aware of:
- Mergers between companies or the acquisition of one company by another.
- Directors’ dealings – when directors buy or sell their own shares in the company.
- Rights issues – issuing more shares to the market to raise more money
- Share buy-backs – when a company starts buying back its own shares, it will reduce the number of shares available on the market.
- Special dividend – a dividend paid out by companies when they are feeling particularly cash-rich, not a regular dividend.
- Share split – a company splits shares into smaller ones, frequently because they are becoming too expensive which can limit trading.
Who trades shares?
Shares can be bought and sold openly by retail investors through a stock exchange using a broker. However many shares in companies are bought by financial institutions such as banks, pension funds and institutional investors.
What affects the price of a share?
The price of a share can be affected by many things including:
Earnings are the profits a company makes and has to report on a regular basis. Investors look at a company’s earnings to see whether they are better or worse than expectations.
- News about a company
News about new products, changes in management, change in strategy can all affect the share price.
- News on external factors
News regarding the company’s industry, peers and trading conditions can all affect the supply and demand and therefore price of that stock.
Trading on share prices with City Index
- City Index allows its customers to trade CFDs on the price of over 6,000 shares
- CFD trading allows trading on price movement without the costs of owning the actual shares