As part of the ‘What is a …’ series, I aim to provide some background on what I view as the 5 main asset classes for retail investors; Stocks & Shares, Fixed Income, Commodities, Property and Cash. I will explain in simple terms what each asset is and what their strengths and weaknesses are. I will use real world examples to help demonstrate this.

Stocks & Shares 

Stocks & Shares, or just stocks, or just shares… or equity… (different words for the same thing) are essentially little pieces of ownership of a company. Publicly traded companies are corporations which have sold a significant chunk of their shares to the public i.e. Apple, Tesco, British Airways. If you made a company and cut it into 100 pieces, you have a privately (not public!) owned company with 100 shares in total. Say you then sold 90 of those shares to friend, the company is still privately owned as no one in the public was able to buy any of your business. Now imagine, you sold those 90 shares at a public marketplace where anyone could buy them… you would then have a publicly traded company. Either way, the pieces you cut the company into are shares. In the real financial world these marketplaces are called an exchange.

Shares of publicly listed companies can be traded on exchanges, like the London Stock Exchange.

Why Sell Shares?

You sell shares in order to raise money. Here is an example…imagine you had an idea for a great new toy. Lets say you managed to make 100 toys with the money you have. You own 100% of the business. You can either try and sell some of the 100 and then use the cash to make more, and keep churning over and over and over. Or you could sell 10% of your company to the public, (hopefully for a large amount of money if your toys are any good…) and then use those funds to make 1,000 toys – enabling your business to become profitable and competitive more quickly. This idea of selling small parts of your business to make it something bigger, is the fundamental reason companies sell their shares to the public.

Why Buy Shares

The reason you, as an investor, are willing to pay for cash for shares in a company is because you believe the value of the shares will be worth more in the future than they are now. A share of Apple Inc. when the company went public in 1980 was $22, those same shares are now worth over $10,000. However as with all things investing, nothing is for certain. The price of the shares you buy may go up or down over time – this is the risk of buying shares. If you choose the right companies, you can make a significant return, but getting it wrong can leave you with next to nothing.