Shares ("Equities")

Shares are the direct route to participating in the risks and rewards of enterprise

Shares are.....

........small slices of ownership of individual industrial and commercial enterprises. BP PLC (more familiarly just 'BP') is one of the UK's largest companies. It has issued some 20 billion shares (2020) - all of them owned by somebody or something. If you own one BP share you own one 20 billionth of BP. You have a 'share' of BP. That is why it is called a share.

Shares are also called 'equities' or 'stocks'. Blame the Americans.

More on what you own

Actually, the precise details of what you own, together with the rights and liabilities attached to ownership, are written down somewhere in lawyer-speak. It is possible to have different types of share. They may be 'A' shares or 'B' shares or 'Preference' shares.

Luckily, these 'unusual' shares turn out to be a minority sport. The vast bulk of company shares are ordinary shares. And that is usually their technical title: Ordinary Shares. When we talk about 'shares' without qualification we are invariably talking about Ordinary shares. And Ordinary shares have simple rights. Their owners ('holders'):

  • receive dividends, which is the cash payout a healthy company makes every year out of the profits it has made;
  • elect the Directors (who are actually the people who control the company, not you, but being able to hire and fire them is the next best thing). Some shares are non-voting, which means you can't fire the Directors, but don't let's get into that;
  • receive the proceeds of disposal of the assets of the company if it is wound up.

These three attributes give your share a value.

Markets

Anything that has a value can be bought and sold. That is what equity markets are for. So a share is not only an asset with value. It is also easily tradeable.

Not all shares can be traded on established equity markets. There are smaller markets for some shares without a publicly accessible price quotation. Such shares are called 'unquoted'. At the bottom end of the scale, you may have a share in your Uncle Steptoe's refuse collection business, but if you want to sell you will have to find a buyer yourself.

All markets are not created equal. Each one has its own set of rules and regulations geared to its history, legal jurisdiction and commercial intentions. The London Stock Exchange (LSE), for example, which you might think is a branch of government given its importance, is itself a major company, internationally owned, and - yes - with shares quoted on itself.

Confusingly, the LSE actually comprises two markets: the Main Market and the AIM market. These markets have different rules - the AIM market being simpler than the main market and therefore with less protection for the investor. For some reason brokers do not have to identify the latter on their lists, so without research you do not know what you are buying.

Warnings

The modern share is a wonderfully flexible and functional financial construct. But there are risks:

  • Your share could be removed from the trading lists of a recognised market. Only a risk for small, dodgy companies. But if it happens, how do you sell it?
  • Your rights could be subverted by a majority shareholder directing the company to his advantage and not to yours. This is a big subject. Broadly, you have substantial legal protection on the major stock exchanges.
  • The company could be raided by its directors before you and your fellow shareholders get a chance to fire them. Or without your noticing. Directors
  • Your shareholding could be diluted without compensation. If BP, with 20 billion shares in issue, issued 20 billion more it would still be the same company but its value would be spread over 40 billion shares instead of 20 billion. So your share would have halved in value. (In the case of BP, and all Main Market shares, the rules protect you from this)

But do not be frightened

With the great majority of shares that are quoted on reputable exchanges you will come to no harm. In the UK the top 350 companies are a safe haven.

You may think that some form of pooled investment - funds or investment trusts - is the answer. For our views on how to get into equities: Equities: How?