Share market, stocks, shares, equity markets, security, index … We have all heard the complex names that line business headings and are too often mentioned at dinner parties; but what are shares, and what is the share market?
A share is the smallest unit of ownership in a company. Multiplying the share price by the number of shares gives you a company’s market value of equity. In effect an investor can buy a share and have share in the ownership of the company. At the date of writing this article Microsoft had a share price of $18.75, and approximately 9 billion shares. We would therefore calculate its “market cap” (Market value of equity) to be $161 billion. Bill Gates currently owns 850 million shares. We would therefore say that Bill Gates has a 10% stake in Microsoft.
How do we make money off shares?
There are two ways to make money off shares- first through capital gains and second through dividends. Capital gains relate to increases in the value of a share. If for example today you purchased one share in Microsoft at $18.75 and it rose to $28.75, you are said to have made a capital gain of $10. Dividends on the other hand are defined as distributions of net profit to shareholders. At the end of each period (normally quarterly or semi annually) a company will announce a “dividend per share”. Each shareholder would then be sent a cheque of the dividend per share multiplied by their shareholdings.
For example, let’s assume Microsoft makes a profit of $18billion and pays 50% of this in dividends ($9billions). Shareholders what therefore receive a dividend per share of $1.
(Dividend per share = Total dividend/number of shares = 9billion/9billion = $1 per share)
Understanding data:
I am sure many of you have stared at the endless columns of numbers and symbols that fill the business section of newspaper. I therefore feel that in this introduction it would be fitting to give you a brief understanding of what these numbers and symbols mean. That way you can immediately put this lesson into practice.
- Code: This is the symbol of the particular stock and is basically an abbreviation of the company.
- Change: This is the percentage change of the stock in one day. It is the percentage difference between the opening and closing prices of the stock.
- Closing price: This is the price of the stock at the very end of the day
- Opening price: A stock markets opens at 10 in the morning and closes at 5 at night. A share may only be bought or sold during this time. The opening price therefore represents the price at the very morning or in other words the price the previous evening.
- High/Low: These represent the highest and lowest prices of a stock during its trading day
- 52 week range: This represents the range of values of a share price over a year. We can quickly compare this to the share price to identify its recent performance. As we can see Microsoft’s share price has fallen considerably from its 52week high
- P/E: This stands for “Price over earnings per share”. We will look at this ratio in greater detail in future artices but to gain an understanding I will show you an example:
o Lets’ say a company has 100 shares at a price of $10 per share. During the year it makes a profit of $200. This equates to (200/100) $2 per share. The PE ratio as calculated by the current share price divided by net profit per share would therefore be 5 (10/2)
- Div Yield: The dividend yield is calculated through the following formula: Dividend per share/share price x 100. It basically says that if the share price and dividend payout was to remain the same each shareholder will get a check equal to that percentage.
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