A stock (also known as a share) is a unit or piece of ownership in a company. Each share is worth a certain amount of money based on what the company is worth. A company will issue shares to investors in order to raise money so that they can grow and operate their business.
If you want to learn about the benefits of stock investing, please read our article: Why should you invest in stocks?
What do shares do?
Ownership of a company is determined by how many shares are issued and the total number of shares in a company.
As an example, Kwame wants to start a wheat farm due to the growing demand in his country. Kwame estimates that it will cost $20,000 USD to start his business for all of the land, supplies, equipment and labor.
The problem is that Kwame only has $10,000 USD saved that he can use to start his business. Kwame can’t successfully start his business with this amount of money and needs to find the remaining $10,000 somewhere else.
Rather than getting a loan from a bank or lender, Kwame issues stock to investors to help raise the additional money. Kwame convinces his brother, Amare, and his friend Sabra to invest $5,000 each into the business.
By doing this, Kwame gives up 50% of his business in shares to Amare and Sabra. They now own 25% of the farm each.
5 years later, Kwame’s farm has been very successful and has grown to start producing tomatoes and onions as well. Kwame’s business is now worth $100,000 which means that his share in the company is worth $50,000 while Amare and Sabra’s shares are worth $25,000 each.
The farm business also generates $50,000 in profit each year which all shareholders are entitled to receive a percentage of. Kwame will receive $25,000 or 50% each year in the form of a dividend. This payment is made by the company to shareholders. Amare and Sabra will each receive $12,500 as they own a 25% share in the business.
How do you buy shares?
In the same way that you can buy shares in a friend or family member’s business, you can also purchase shares in publicly traded. Companies like Apple, Google and Safaricom are on the stock market. For more information on stock markets and exchanges, please read our article What is the Stock Market?
Because these companies are larger you will own much less of the company. However, these companies are often well managed and are considered as a relatively safe and reliable investment.