Investing 101: What are Shares?

For advanced investors, you may already understood what shares are. But for many people who are just starting to learn about investing, they may be very curious about shares. They have seen people make a fortune thorough it, they have also witnessed their friends lose everything from share markets. For people who do not understand what shares are, they regards share investing as gambling. When asked, they may tell you shares are playing around with a chart.

What Shares Really Are?

Shares, or a common stock, is a part of ownership of a business.

For instance, Tom started a seafood supplying business "Tom's Seafood"in his town with a capital of $100,000. After 10 years of hard work, the business is now worth $ 3,000,000. Tom now plans to expand his business into a new market. However, the cost of setting up branches and marketing campaign for a new market is so much beyond his company cash reserve. He has a few options, He can either take a loan from the bank, issue a bond, crowdfunding, or going public through Initial Public Offering (IPO). The last option is where shares come from.

Assuming Tom's Seafood needed $1,500,000 for his new expansion project, he would now engage an investment bank to plan for his IPO. The investment bank then divide his business into 4,500,000 small pieces and list the company on stock exchange at $1 each share.

Now, Tom retained his 3,000,000 share through private placement, and 1,500,000 shares to sell to the public.To simplify the scenario, assume that there is no cost incurred during the IPO process. After IPO, Tom's Seafood Limited now has $4,500,000 worth of equity (3 million initial worth + 1.5 million cash from IPO). Tom owns 66.66% (3,000,000/4,500,000)of the company through the shares that he holds.

Let's say today you spend $ 45,000 to buy 45,000 units of Tom's Seafood Limited during the IPO, now you own 45,000 / 4,500,000 of the company, which turns out to be 1% of company ownership.

When Tom's Seafood make a profit in a new market, the equity of the company increase in the company balance sheet, so as the net asset value of the shares you own. In another word, you are Tom's business partner.

Being a share holder of a public listed company, you have a limited liability. This means that if one day Tom's Seafood filed for bankruptcy due to poor business and bad debt issue, the banks and supplier has no right to claim any money from you. The worst scenario in this case, you lose all you money and that's all.

Want to get our latest articles? Subscribe and Like us on Facebook!