A stock or share is a part of a company. For a simple example, if a company is worth £50 million, and it has 25 million shares, each share would be worth £2 or 200p. You could buy 500 shares for £1000 (plus fees and stamp duty).
Key points on shares are:
- The price of a share is initially determined by the firm offering the shares, but the price at any given time (prices can change by the second) is determined by a number of factors; supply and demand, finances and performance, economics, politics and market sentiment.
- You gain money from investing in shares in 2 ways:
- Capital gains. The sell price of the share price increases above the price you bought it for. You sell the shares and make the difference in the price you sell for against what you bought the shares for. To continue the above example, if the sell price of the share goes up to £2.50, you could sell them for £1250, and you would have made £250 profit (minus the fees and stamp duty).
- Dividends. Some companies payout dividends to their shareholders. This is essentially the company giving a share of its profits to its shareholders. You will see this expressed as dividend per share (how much you will receive for every share you own) or dividend yield (a percentage of the value of the shares you own). For example, if a company's shares are worth £2 / 200p and they decide they will payout a dividend per share of 4p, this could also be expressed as a dividend yield of 2%. If you owned 200 shares, you would receive £8. Some further points on dividends:
- Ex-dividend date. This is the date on which you have to have started the day owning the shares in a company to receive the dividend. In the UK, these days tend to be on a Thursday. For example, if an ex-dvidend date is 6 Apr 23, you would have to have bought the shares on 5 Apr 23 or earlier, and still own them on 6 Apr 23.
- Payment date. The date on which you will receive the dividend payment. This can be up to a month after the ex-dividend date. Of note, you do not have to still own the shares on the payment date to receive the dividend - you will receive the payment if you sell the shares between the ex-dividend date and the payment date.
- Impact on share price. On the ex-dividend date, all things being equal, the share price tends to drop by the dividend per share value. From the example above, the £2 / 200p share paying out 4p would drop to £1.96 / 196p. However, the other factors that influence share prices will still come into play, so it is unlikely to be a clear 4p drop.
- You lose money when the sell price of the share decreases below the price you bought it for, and you sell it for the lower price. To continue the above example, if the sell price of the share drops to £1.50, you could sell them for £750, and you would have lost £250 (plus the fees and stamp duty).
- The buy price is always higher than the sell price. The difference is known as the spread. If you therefore bought shares and sold immediately without the price changing, you would be out of pocket.
