What is a share?

Investing in shares is a common way for people to try and build wealth, but what exactly is a share and how do they work?

What is a share? Simple definition

A share is a portion of ownership or ‘equity’ in a company. Shares are also sometimes referred to as stocks. Shares of publicly-listed companies can be bought and sold on a share exchange, such as the Australian Stock Exchange (ASX). The investors who own the shares in a company are known as ‘shareholders’.

The value of a company’s shares can rise and fall depending on how many people want to buy and sell the shares at a given time. This can be influenced by a range of factors, including the current performance of the company and how confident investors are in its future performance.

The shares of more than 2,100 companies are listed on the ASX, and they range from everyday brands such as banks and retailers, to lesser-known firms, including miners and manufacturers of medical equipment. Shares are just one of the common asset classes that investors can put their money into.

That said, bear in mind that not every company in Australia is listed on the ASX. For example, many companies are privately owned and do not have shares available for the general public to buy.

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How do shares work?

Some companies issue shares to the public as a way of raising money (e.g. to enable them to grow into a new market or to weather a challenging business period). This means anyone can purchase a share of the company and in return they become part owner of that company. When a company chooses to issue shares in this way, it becomes a publicly-listed company, meaning its shares can be bought and sold openly on a stock exchange. The initial sale of a company’s shares is made through an IPO or ‘Initial Public Offering’. After that, shares can be traded (bought and sold) through the stock exchange the company is listed on. Typically, investors use an intermediary or ‘broker’, such as an online share trading platform, to buy and sell shares.

Once a company’s shares are being traded, the value of the shares can rise or fall. This can make it a volatile and potentially risky way for someone to invest, according to Moneysmart. For example, the value of a share can fall to zero, meaning the investor would lose all of the money they paid for the shares. But on the other hand, shares can rise in value significantly, particularly over long periods of time. An important point to remember is that the past performance of a company’s shares does not reliably indicate how the shares will perform in the future.

As a shareholder, an investor may get certain entitlements and benefits, such as being able to attend and vote at some company meetings (such as the annual general meeting or AGM). They may also receive a dividend, which is a payment made by the company to shareholders based on profit made in a particular period. However, not all companies choose to pay a dividend, even if they have made a profit recently. The entitlements on offer to shareholders can vary depending on what type of shares they own.

What are the different types of shares?

There are three separate categories of shares that can be traded on the ASX. The ASX explains the difference between them as follows.

Ordinary shares

This is the most common type of share, according to the ASX. Holders of ordinary shares usually have the right to vote at a general meeting of the company, and to benefit from any dividends paid or any distribution of assets if the company is wound up.

Preference shares

Holders of preference shares usually have ‘preference’ over ordinary shareholders when it comes to dividend payments or what money they may receive if the company is wound up. The ASX says there are different kinds of preference shares, with different rights and characteristics depending on the terms of the shares. Holders of preference shares usually have restricted voting rights.

Partly-paid shares

With partly-paid shares, the shareholder only pays a portion of the full share price when investing initially. However, at a specified future time, the company can request that the shareholder pay the remainder of the price and the shareholder is legally obliged to do so.

“Generally, a holder of a partly-paid share has the same rights as an ordinary shareholder to vote, to dividends and on winding up of the company, but those rights will be proportional to the amount paid on the share (except for a vote by show of hands, where a holder of a partly paid share has one vote, the same as any ordinary shareholder),” the ASX explains.

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Frequently asked questions about shares

What is the difference between a share and a stock?

The terms ‘share’ and ‘stock’ are often used interchangeably, but can also mean subtly different things. A share is a specific unit of ownership in a company at a certain price. ‘Stock’ on the other hand, is generally understood to mean the broader idea of having equity in a company. For example, if someone says they have stock in a company they could be referring to multiple shares they own.

Why do people invest in shares?

In general terms, people invest in shares in the hope that the value of those shares will increase in the future, meaning they would earn a profit when they sell those shares to someone else. But the value of shares can also fall, meaning it’s possible to make a loss on your investment. Shares can be bought by individuals, but also by institutional investors like investment funds that manage the money of a group of people. A super fund is an example of an institution that buys company shares on behalf of members, along with other types of assets.

Some investors also purchase shares with the aim of earning a regular income through payments they would be entitled to if the company issues dividends. But again, there is no guarantee that a company will pay dividends to its shareholders.

Less commonly, some people buy shares to gain influence over how a company is run – for example, by being able to ask questions of the management and vote at general meetings. People who buy shares for this purpose are known as ‘activist investors’.

How many shares are there in a company?

The number of shares a company has varies from one firm to another, usually depending on the business’ goals and strategy. There are no limits on the number of shares that can be issued and a company may choose to increase the number of shares it has by issuing new ones to raise extra funds, or by splitting their existing shares (in practice creating new shares but without changing the total value of all the company shares, known as the ‘market cap’). A company can also reduce the number of shares it has on issue by buying back shares and cancelling them, according to corporations and market regulator, the Australian Securities and Investments Commission (ASIC).

How much is a share worth?

The value of a share can vary massively depending on the company. A single share can be worth hundreds or even thousands of dollars, or just a few cents. The value of a share can also change over time, either increasing or decreasing based on factors such as the company’s business performance, overall market and economic conditions or simply the number of shares that the company has issued.

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