“Stocks”, “equities”, and “shares” are the same thing. “Shareholders” are people who own these stocks/equities/shares.
A stock represents ownership in a company. For example, let’s assume that a company has 1 million shares, each priced at $500. Hence, the value of the whole company = $500 million (1 million x $500 = $500 million).
When you buy (own) a stock, you essentially own 1 / (# of shares) of that company. For example, if you own 20 shares in a company that has a total of 1 million shares, you essentially own 20/1,000,000 of that company. As you can see, the nominal # of shares that you own doesn’t matter. What matters is how much % of the company you own. As you buy more of the same stock, your ownership stake in the company increases.
As a part-owner in the company, you own a part of everything the company owns. So if the company owns $10 billion worth of factories, inventory, land, buildings, equipment etc, and you own 2% of the total # of shares, you own 2% of the $10 billion.
However, as a share holder, you cannot receive the companies’ factories, inventory, land, buildings etc in exchange for your stocks. If you want to sell your stocks (realize the $ value from your stocks), you have to go to the stock market and sell your stocks for cash. You cannot touch the companies’ assets.
As part owner, you also own a % of the company’s profits. So if you own 2% of the total # of shares, you technically “own” 2% of the company’s profits.
As a part-owner, can you impact the company’s decisions?
We’ve established that as a owner in the company’s stock, you are technically a part-owner in the company.
As a part-owner, does this mean that you can impact the company’s operational decisions?
Yes, but only indirectly.
Every company has a Board of Directors. The people on these Board of Directors oversee the company’s management. As a shareholder, you vote for who goes on the Board of Directors. One share, one vote. So if you have more shares, you have a bigger say in who is on the Board of Directors.
This is similar to a democracy. The people don’t directly vote on a country’s day-to-day decisions. The people vote for elected representatives, who oversee the country’s day-to-day operations. The only difference is that unlike in a democracy, shareholders don’t all get the same vote. The more shares you hold, the more you vote. One share, one vote. If you have 1000 shares, you have 1000 votes.
Here’s an example
Let’s assume that you own 10 shares of Apple (each share of Apple is worth $225, so in total you own $2250 worth of Apple). Apple has issued a total of 4.8 million shares. Hence you own 10/4.8 million of Apple as a company.
How many shares can a company issue?
A company can issue as many shares as it wants. For example, a company can have 60 million shares, each at $1000. The company decides how many shares it wants to issue.
In a nutshell, by issuing stocks, the company is splitting up ownership among different people.
Sometimes companies can do:
- Stock splits. This is when every stock is split into more stocks. For example, a 1:3 split turns every existing stock into 3 new stocks. So if you owned 100 stocks of Company XYZ, you now own 300 stocks of Company XYZ. But at the same time, the price of each stock has decreased by 1/3. As a result, the value of your total stock holdings remains unchanged. The only difference is the nominal # of stocks you own.
- Reverse splits. This is when every stock in the company is combined. For example, a 2:1 reverse split turns every 2 existing stocks into 1 new stock. So if you owned 100 stocks of Company XYZ, you now own 50 stocks of Company XYZ. But at the same time, the price of each stock has increased by 2x. As a result, the value of your total stock holdings remains unchanged. The only difference is the nominal # of stocks you own.
Here’s an example
On May 16, 2018, Amazon splits its stock 1:2
Before the split: Amazon stock was $2000 a share and had a total of 500 million shares (total value of the company at $1 trillion).
After the split: Amazon stock was $1000 a share and had a total of 1 billion shares (total value of the company at $1 trillion).
What is the stock market
The stock market is where all the stocks are bought and sold. For example, the U.S. stock market is where all the U.S. stocks (companies) are bought and sold.
In effect, the stock market also establishes a $ PRICE for each stock.
This price fluctuates every single second. For example, Apple’s stock price changes every single second. This second it could be $120.5, the next second it can fall to $120.47, the next second it could fall more to $119.12, the next second it could go up to $121.5
The changes in a stock’s price is based on SUPPLY and DEMAND for that stock at that given moment in time.
- If there’s more supply (wanna-be sellers of the stock) than demand (wanna-be buyers of the stock) at that point in time, the stock price will fall.
- If there’s less supply (wanna-be sellers of the stock) than demand (wanna-be buyers of the stock) at that point in time, the stock price will rise.
The “stock market” is a general term. There is no physical place called “the stock market”.
Specifically, stocks are traded (bought and sold) on a STOCK EXCHANGE (shortform = “exchange”).
- An exchange used to be a physical building in which humans bought and sold stocks.
- With the advent of computers, an exchange has become a bunch of computers (owned by the “exchange”) that electronically connects buyers and sellers. Kind of like eBay (eBay connects buyers and sellers).
Here’s an example
The U.S. stock market is the largest stock market in the world. The term “U.S. stock market” is generally “all the U.S. stocks, combined”. Compared to other stock markets like “the Canadian stock market” or “the Chinese stock market”, the U.S. stock market is much larger.
This is because the U.S. has the largest companies in the world. Think about the giants like Google, Facebook, Amazon, Boeing, Apple
The U.S. has multiple stock exchanges. The biggest U.S. stock exchange (also the biggest exchange in the world) is the New York Stock Exchange (aka NYSE). This is where most of the U.S.’ stocks are bought and sold. By buying and selling stocks at the NYSE, the NYSE also creates a market PRICE for each individual stock
What is a “stock index”
The “stock market” is a vague, generalized term. A “stock index” tries to quantify this generalized term.
A stock index (aka stock market index) is a MEASUREMENT of a basket of stocks (i.e. a part of the stock market). The stock index is created and electronically calculated (second by second) by a big financial company that specializes in creating indexes (e.g. Standard and Poors).
Each stock index is designed to track and measure a basket of stocks. The company that creates the index decides what “part” of the stock market to track.
- The S&P 500 is the world’s most famous stock market index. It tracks the U.S.’ 500 biggest stocks (e.g. Google, Apple, Boeing, Caterpillar, JPMorgan, Goldman Sachs).
A stock index looks at on average, how well a selected basket of stocks are doing. The stock index has a nominal # value. This nominal # value is irrelevant. (For example, the S&P 500’s current nominal # value is 2900. This doesn’t mean that the average stock price in the S&P 500 basket = 2900). Instead, what matters is the index’s % change vs a previous period.
For example, let’s assume that the S&P 500 has gone from 2800 to 2900 over the past 2 months. This means that the average stock’s price in the S&P 500 has gone up 3.5% over the past 2 months (2900/2800 = 3.5%)
Every index was arbitrarily assigned a “base #” in the “base year” (the year the index was created). For example, the S&P 500 was assigned a base # of 10 in 1950, the year it was created. With the S&P 500 now at 2900, it means that over the past 68 years, the average stock in the S&P 500 has gone up 290x (2900/10 = 290)
For example, here is a chart of the S&P 500 over the past 50 years. It’s important to use a log scale instead of a linear scale. Linear scales are most commonly used by financial media, but log scale shows a stock’s % change over time. We care about %, not absolute value $ changes.
Stock indexes are frequently used to describe the “stock market”. For example, when people say that the “stock market is going up”, they are usually referring to the fact that a widely mentioned index (e.g. the S&P 500) is going up.
The index is important because it tells you how well the stock market is doing, on average.
- For example, let’s assume that the S&P 500 is going up a lot. This doesn’t mean that every single stock in the S&P 500 is going up. It just means that the average (majority) of stocks are going up.
- For example, let’s assume that the S&P 500 is going down a lot. This doesn’t mean that every single stock in the S&P 500 is going down. It just means that the average (majority) of stocks are going down.
Here are other examples of stock indices (indices = plural of “index”)
- Russell 2000. This index measures 2000 small stocks in the U.S. stock market.
- Dow Jones Industrial Average. This index measures 30 old fashioned stocks in the U.S. stock market.
- TSX. This index measures 250 Canadian stocks, which account for approximately 70% of the entire Canadian stock market.
- The S&P 500 (as mentioned) is the most popular stock index in the U.S. (and hence the world). It covers approximately 80% of the entire U.S. stock market.
Click here for more investing for beginners tutorials