How do stocks work
What are stocks? And what is a share worth?
A share is a share in a company (a stock corporation). So shareholders are co-owners who have a financial stake in the company. In return for his capital, the company gives the shareholder one share.
In doing so, he acquires certain rights - such as the opportunity to have a say (administrative rights) as well as the right to participate financially in the company's success (property rights).
The legal form of this company must not necessarily be a stock corporation. The European form of the stock corporation (Societas Europaea, abbreviated SE), the US-American Inc. or the British PLC is also conceivable. In France, Spain or Italy, such a company is often abbreviated as SA. In Germany there is also the option of founding a partnership limited by shares, the KGaA.
What is a share worth?
On the subject of “What is a stock simply explained” also includes the question of what the stock is worth. To the Face value To determine a share, the AG divides its equity by the number of shares.
If a stock corporation has issued 1 million shares, each share represents one millionth of a share in the company. In this example, anyone who owns 1,000 shares has a one percent stake in the company.
Every shareholder is a shareholder - regardless of whether the company listed on the stock exchange is or not. Because there are many stock corporations whose shares are not freely traded on the capital markets.
If it goes public, it will Share price the important and relevant quantity - i.e. the value at which the shares change hands on the stock exchange. This share price is determined by supply and demand. When more investors want to buy than sell, the value of the stock rises. The value of a share on the stock exchange is therefore primarily based on the buyers' expectations of how the company will develop in the coming months and years.
Market value vs. nominal value of shares
The value of all shares in a company is also called Market value designated. This rises and falls with the stock exchange prices.
Example: If a stock corporation has 1 million shares in circulation that are trading at EUR 7.23, the market value is EUR 7.23 million (1 million shares x EUR 7.23). If the share price falls to 6.99 euros, the market value is only 6.99 million euros.
In contrast, the nominal value of a share is fixed. It denotes the share of the original capital of the stock corporation that is divided among all shareholders.
Example: If a company with a capital of 100 million euros issues 1 million shares, the nominal value of one share is 100 euros. Regardless of this, however, it may be that it is only traded for 7.23 euros on the stock exchange.
Bid price and ask price on the stock exchange
If a company is listed, there are different values for share prices: For example, there is talk of a last price, a bid price and an ask price. All three courses depend on willingness to buy or sell stocks.
- The Ask price of a share signals the value at which a shareholder would sell a share.
- On the other hand he gives Bid price how much a prospect is willing to pay for a share of the company.
- The last course is the person with whom the buyer and seller last agreed to trade.
Example: If a share is quoted at 7.23 euros (last price), this means that a share was last sold for exactly this amount. In addition, an ask price of EUR 7.29 can be recorded - i.e. another shareholder would be willing to sell the share if he gets more than the last traded price. If a bid price of 7.25 euros is given at the same time, there is also a buyer who is willing to pay more than the last price - but there is no share trading as long as there is no seller at this price.
What's the point of owning stocks?
Shareholders participate in the company's success and regularly receive a dividend, provided that the stock corporation generates a profit.
In addition, ordinary shareholders are also allowed to participate in company decisions, for example at the annual general meeting of a company (preference shares or other special forms are an exception).
The most common motive for buying shares is undoubtedly the long-term good development of a company. Investors hope that this will result in a higher share price in the future, so that they can then sell the shares at a profit. Because it is a very complex task to capture the business model and future prospects of a stock corporation, including all market and price risks, it is more interesting for most individual investors to invest in a number of companies, for example across a wide range ETF (disambiguation:what are ETFs simply explained?). So if you compare stocks with ETFs, the risks are spread significantly better with funds and thus reduced.
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