Introducing the concept of shares
In
any economy (financial system) there are two types of people, those who spend
and those who save. Practically these two people are the same because whenever
someone earns/gets money, normally a part of it is spent, and a part is saved.
Therefore, the economy is made of “surplus spending (total income that is
consumed)” and “net savers (the remainder of the economy that is not spent)”.
Usually,
the income that is not spent is stored
in banks, but that is not a very wise thing, because it can be invested and hence generate more
income. This means that instead of just storing y our money somewhere where it
only stays idle, you can put it somewhere where it can make you more money. Isn't this an appealing idea that your money works for you to bring in more
money? One way to do this is to invest
your money in the stock market. This concept will be explained hereunder,
and in subsequent posts.
In
the society there are people who want to start different companies or expand
existing companies, and these people need start up money to do so. Money needed
to start and run a company/business is called capital.
Sometimes
as someone wants to start or expand a company, they may not be able to come up
with enough money to do so, thus they have to find another means to be able to
get enough capital. They may choose to borrow money from external sources,
normally a bank (loan), or they may
get money by selling a part of their company ownership to someone else and use
the money as the finance they needed (equity).
When
a company needs a lot of money, and wants it in the form of equity, they may
not be able to get it from one particular person and so it may sell its “ownership”
to many people in the form of shares.
This company will divide its ownership in many (or few) shares and price them
equally, then sell them. A person can choose to buy as many of these as he/she
can afford and/or as many as they are available. This person will own the
particular company to the extent of the number of shares he/she owns, hence the
term “share”.
Thus
a share is a unit of ownership that
represents an equal proportion of a company’s capital. It entitles its holder
(the shareholder) to an equal claim on the company’s profits and an equal
obligation for the company’s debts and losses. Shares are sometimes also known
as stock.
The
following are some easy-to-digest facts about shares:
§ Shares
represent ownership of the business.
§ Ownership
can either be partial (less than 100%) or full (100% of all shares).
§ If
you want to own a business, you can either:
-
Establish your own business, or
-
Buy shares of an existing business.
§ Share
is a means of capital. If you want to start a big business, and you lack the
capital, you can issue (sell) shares of your business and get the capital.
§ Share
is an earning asset/investment. That is it makes you more money.
§ Share
is a fairly liquid asset. It can be sold within short notice whenever you need
to sell them to get hard cash.
§ Share
is a decision making power. Once you own shares of a business, you own part of
that business and you can participate in the decision making processes by
voting. One share equals one vote. When a company has a lot of shareholders,
they usually cannot agree on everything, so they use their shares as voting
rights to make decisions.
