Stock Market Investing for Beginners: How Shares Work

What is a share?

A share is a small piece of ownership in a company. People also call it a stock. If you own shares, you are a part-owner, called a shareholder.

For example, a simple company has 1,000 equal shares. You own 10 of them. That means you own 1% of the shares, and you get 1% of any cash the company pays out to its owners.

Buying a share is not like putting cash in a savings account or lending money. Nobody promises to give your money back. The value can go up, go down or fall to zero if the company fails.

A company may pay part of its profit to shareholders. This payment is called a dividend. Unlike interest on a loan, a dividend is not a promise. The company can cut it or stop it.

Real companies can have more than one type of share, with different voting rights or dividends. The SEC, the US markets regulator, has a guide to stocks that explains the basics and the main risks.

Who sets the share price?

Shares are bought and sold on a stock exchange. In the US, the biggest are the New York Stock Exchange and Nasdaq. Canada has the TSX, the UK has the London Stock Exchange and Australia has the ASX.

When you buy a share on an exchange, you usually buy it from another investor. Your money goes to that seller, not to the company. A company only gets the money when it sells new shares, for example when it first lists on an exchange.

The price is simply the last price at which a buyer and a seller agreed. Each of them is guessing about the company's future profits. So the price already includes what people expect.

This explains something that surprises many beginners. A company can report higher profits and still see its share price fall. That happens when investors had expected even better results.

How do you read a share price quote?

A trading app shows more than one price for each share. Imagine a quote for a share with a last trade at $20.

The bid is the best price a buyer is offering right now. The ask is the lowest price a seller will accept. The gap between them is the spread. If you bought at $20.02 and sold a second later at $19.98, you would lose 4 cents per share.

A market order buys or sells at the best price available now, which may differ from the last trade. A limit order sets the worst price you accept, but it may never fill. Read the SEC's order types or our lesson on market, limit and stop orders.

How do you make or lose money from shares?

You can gain in two ways. The price can rise above what you paid, and the company may pay dividends. Your real result adds both, then takes away your costs.

The last ending shows an important point. A dividend does not cancel a bigger fall in the price. Always look at the whole result, not just the income.

Taxes can also change your result. The rules depend on your country and your type of account, so check them before you compare returns.

Why not put all your money in one company?

If you own one company, your money depends on that one business. Owning several companies spreads this risk. One company's bad year then hurts less.

But owning more shares does not stop all losses. When the whole stock market falls, most shares fall together. Ten companies in the same industry can also share the same problems. And two funds can secretly own the same big companies.

Your home currency matters too. A Canadian who owns US shares sees two changes in Canadian dollars: the share price and the exchange rate. Read more in currency risk for Canadian investors.

Learn how to spread money well in how to diversify a portfolio. Funds that hold many companies are explained in ETF vs mutual fund.

How can you learn without gambling?

A price chart shows what happened in the past. Research into a business shows how it earns money. Neither one can tell you the future for sure.

Be careful with fast price gains, excited social media posts and one-word labels like "buy". None of them is a plan.

Next, see why a cheap share is not a small company in what is market capitalization. Then build a first investment plan. To practise first, compare free stock market simulators.