All About Shares

Posted:Abigail Andrews – Saturday, May 26th, 2007

This section provides a brief and certainly not conclusive guide to the stockmarket. You should do much more reading in your own time but hopefully this will give you a short insight to the stock market. If you are serious about investing in the stock market my recommendation is to read a book called Naked Trader. A simple, funny, interesting insight to stock market investing for beginners.

What are Stocks & Shares?

Before you delve into the intricacies of the stock market, the first thing you should understand is what exactly a stock is. Stocks, also known as shares, are portions of companies that people can buy, and they therefore own part of the company.

There are a number of different shares you can buy, including preference shares, bonds, and gilts, but the most popular type is the ordinary share. Ordinary shares simply represent ownership of a company.

Owning shares means owning a bit of the company, so, when you buy shares you literally become a part-owner of that business, which gives you the right to a share of the growth and profits (in the form of dividends) and a right to receive the companies reports and accounts. You also have a say in how the company is run, through voting rights. Obviously, the more shares you own the bigger your stake in the company, and the more say you have. As a shareholder as well as the dividends, you may also receive some perks, such as discounts on some of the company's products. A share price is like a measure of investors' confidence in a company and its future. If everyone thinks a company is going to grow and do well, they all want to buy the shares, and this pushes the share price up. The reverse is also true.

Companies do not have to list on the stock market to issue shares. Many businesses start life with friends and family as shareholders. These businesses are called unlisted firms and their shares are often referred to as ‘unquoted’.

Stock symbols

A stock symbol, or "Epic" code, is a stock exchange's standard abbreviation of a stock's name. For example the EPIC for Barclays Bank Plc is "BARC". You can find stock symbols wherever stock performance information is published (e.g., newspaper stock listings, investing sites on the web).Alongside the stock symbol you will find the most important performance indicators for that particular stock. Once you buy some stock, you will use stock symbols to find and monitor your stocks' performance on sites like ADFVN.

Performance Indicators

Alongside the stock symbol you will find performance indicators for that particular stock. Here is a list:

Performance Indicator	Definition
Closing price	The last price at which the stock was bought or sold
High and low	The highest and lowest price of the stock from the previous trading day
52 week range	The highest and lowest price over the previous 52 weeks
Volume	The amount of shares traded during the previous trading day
Net change	The difference between the closing price on the last trading day and the closing price on the trading day prior to the last

What is a Bull, Channelling and Bear Market?

A Bull market is any market in which prices are in an upward trend over a prolonged period and prices rise faster than their historical average.
A Bear market is a prolonged period in which investment prices fall, accompanied by widespread pessimism.
Channeling stocks are stocks that trade within a certain range between high and low price points for a period of time and may become predictable over time. Channelling markets do not significantly rise or fall.

What is a Split?

Basically there are 5 types of split which you should be aware of:

Forward Splits

When a company divides its outstanding shares into a larger number of shares, it is called a (forward) split. The purpose of a split is to improve the liquidity of a stock: the more shares in issue, the easier it is to match buyers and sellers.

A company will sometimes announce a stock split when its share price gets so high that it inhibits further investment. By dividing the stock, the company cuts the share price and makes the stock more affordable. In theory a forward split results in a higher number of outstanding shares and a reduced market price per share.

Don't worry if you already own shares as your investment does not suffer. It can only positively affect your shares as more investors are likely to buy the shares in future.

Reverse stock splits

When a company's stock is trading so low that investors will not touch it, the board of directors may opt to execute a reverse stock split in an attempt to pump up the stock's market price and attract the attention of investors. This consolidates the value of the company into a smaller number of shares, which increases the price per share.

Again, this kind of split does not alter an individual investor's equity in the company; it merely changes the number of outstanding shares. If a company does this though you maybe want to ask your self why you are investing in this stock, make sure you know what you are doing and assess the future of the company.

With both (forward) stock splits and reverse stock splits, it is important to remain focused on the underlying performance of the stock rather than the headline price after the split. The danger is it can be difficult to adjust to this if you are used to keeping track of the stock's performance by referring to the pre-split price.

Rights issue

A company that wants to raise more capital will sometimes offer new shares to current shareholders. This is called a rights issue. The company issues the rights in proportion to existing holdings. For example, in a one-for-two rights issue, shareholders will be offered the opportunity to buy one new share for every two they hold. The new shares are generally offered at a significant discount to encourage take-up. As a shareholder, you are not required to exercise these rights, but if you waive them you risk diluting your existing holding as the total number of outstanding shares increases.

Bonus issue (Script Issue)

A bonus issue is a stock split in which a company issues new shares without charge in order to bring its issued capital (outstanding stock) in line with its employed capital (the increased capital available to the company after including retained profits). This usually happens after a company has retained profits, thus increasing its employed capital. Therefore, a bonus issue can be seen as an alternative to dividends. No new funds are raised with a bonus issue.

Free float (Free Capital)

Free float is the portion of a company's equity that is available for trading on the stock market. Free float can be important in that it affects the liquidity of your stock. If a company only has a small proportion of its stock available in the market, it becomes more difficult to match buyers and sellers. The risk with illiquid stock is that you may not be able to buy or sell immediately and at your chosen price. Also, a scarcity of shares usually pushes the share price upwards.

Free float is particularly relevant to initial public offerings (IPOs) where a small proportion of stock is released to the public, often in the face of huge demand. The effect on the post-flotation share price can be dramatic and investors should beware of buying at too high a price.

What is a dividend?

A dividend is a distribution of a company's profits to the shareholders of that company. Once earnings have been established, the board of directors of your company decides on what dividend, if any, to pay to the shareholders. If the company is doing badly, or if the company needs to reinvest profits, the board of directors may decide not to declare a dividend.

Dividends are 'usually' paid on an annual basis. There are four important dates to take note of and remember in relation to dividends:

• Declaration Date - The date on which directors the dividend to shareholders and when it will be paid.
• Record Date - The company inspects its list of shareholders to see who will be paid a dividend. If your name is not on the list, you do not receive a dividend.
• Ex-dividend Date - The ex-dividend date is typically three business days prior to the record date. If you purchase the stock after this date, you will not be entitled to a dividend.
• Payment Date - Shareholders are paid the dividend. It typically comes two weeks after the record date.

What is a Stock Index?

You are likely to have heard the term "the FTSE closed 60 pts up today" on the news at some point in your life, but what does that mean? An example indices is the FTSE100. The FTSE 100 is a benchmark index tracking the performance of the top 100 companies listed on the London Stock Exchange.

Stock market indices (e.g. FT 100 on the FTSE) are measurement tools. They are used by investors to track the market, gauge its performance and then consider the implications of its ups and downs. Indices are useful because they sketch a broad picture of market trends. Knowing how to read individual stock prices from the financial press is important, but it is equally important to follow general stock market trends, since individual stock prices can perform quite differently from the market as a whole.

Index values are recorded continuously throughout the day. At the close of trading each day, you can see the average price movement for the index compared with the previous day's closing value. Index movements are recorded in points. A rise in an index indicates that the stock market has generally performed well on that particular day; a fall indicates the opposite. Movements in indices over time act as a kind of economic barometer. A rise is usually a sign of good economic health for a country, whereas a drop over time signifies an economic downturn.

Most indices are weighted. This means that larger companies, as defined by market capitalisation, have a greater impact on the value of the index.

Types of Stock Index

Not all indices are the same. Firstly, they contain different numbers of stocks. The UK FTSE-100 contains 100 stocks, while the american equivalant Dow Jones Industrial Average contains only 30.

Indices can cover whole markets, or just particular sectors of markets. Some cover established blue-chip stocks across the whole market. Others are just based on stocks in particular industries, such as transportation or utilities.

Share Prices

• The Bid Price - The quoted price at which an investor can sell a share. The price at which shares will be bought back from their holders by the markets.
• The Ask Price - Otherwise known as the offer price, the Ask Price is price an investor will pay to buy a share.
• The Spread - This is the difference between the BID and ASK price.
• Mid Price - Obvious really, this is the price half way between the bid and the offer price.

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