How shares work

1. How shares work How shares work Money Works: Level 2 Topic 2

2. Contents What is a share? 1 Why do people trade in shares? 2 What is a shares portfolio? 3 What is the best/worst that can happen on the stock market? 4 How do you buy and sell shares? 5 How shares work Money Works: Level 2 Topic 2

3. 1. What is a share? • A share represents part-ownership of a business. • Most businesses in the UK are owned by the people that run them. • However, larger businesses are usually owned by shareholders. • This means that the business sells shares in their company to whoever wants to buy them. • So a shareholder owns part of the business. How shares work Money Works: Level 2 Topic 2

4. 2. Why do people trade in shares? • Shareholders buy and sell shares in order to make money. For example, if you buy 1,000 shares at £1 each and five years later the share price is £2, your investment is worth £2,000 (double what you paid!). • Some shareholders also receive a part of the company’s profit in the form of a dividend. The value of shares changes all the time, depending on a range of factors. For example: • how well the business is doing • what is happening in the economy • whether the business is being taken over • The value of shares can go up making shareholders very rich. • They can also go down, or the business could fail, leaving shareholders with a loss. • The trick is to buy shares when they are low in price and then sell them when the price goes up. How shares work Money Works: Level 2 Topic 2

5. 3. What is a ‘shares portfolio’? • This is a collection of shares that have been bought in a range of different businesses. • The idea is to have a balance of share ownership, e.g. some more risky but potentially more rewarding, some less risky but unlikely to provide a very large return. • Sometimes you will do well with some shares and badly with others. • The idea is that overall the portfolio grows in value, but remember that the value of shares can fall as well as rise and will change from day to day. So they are not suitable as a short-term investment where you may need your money quickly. How shares work Money Works: Level 2 Topic 2

6. 4. What is the best / worst that could happen? • London-based estate agent group Savills has grown by 1,949% over 10 years (2000 – 2010). A £1,000 investment would have grown to nearly £20,050. • The UK’s oldest merchant bank and personal bankers to the Queen, Barings Bank, were once worth millions. They went bankrupt and sold for £1. A £1,000 investment would have shrunk to exactly nothing. How shares work Money Works: Level 2 Topic 2

7. 5. How do you buy and sell shares • All shares in UK businesses are bought and sold via The Stock Exchange in London. • Individuals who want to buy shares often pay a stockbroker to give them advice on what to buy and when. The broker will buy and sell the shares for them. • Individuals do not have to use a broker and can buy shares via the internet or from banks. • The latest share prices are published on various websites and in daily newspapers, e.g. The Financial Times. How shares work Money Works: Level 2 Topic 2