What are shares?

More and more people are taking their financial future into their own hands by choosing to invest. Whether you are growing your pension pot through your bank or exploring the exciting world of shares yourself, knowledge is power. You may have been investing for a while, but you really want to understand what shares are and how they work. In this article, we will explain it to you quickly, as objectively and simply as possible.

A piece of business

The short answer to the question 'what is a stock' is: a piece of a company. But a company is made up of machines, people, products, etc. How can you own a piece of all of this?

This has to do with the way companies are founded. The document that is drawn up when a company starts, notes how many shares the ownership of the company is divided into. It also notes how many shares the different founders own.

A founder who receives 40% of the company's shares upon incorporation is entitled to 40% of all the company's assets. If it is decided that the company will distribute the saved profits, the founder will receive 40% of this.

Stock exchanges

If a company wants to raise a lot of money for a large investment, the company can choose to 'go public'. The company then creates new shares by noting in the articles of incorporation that the ownership of the company has now been split into more pieces. The new shares that are created in this way are sold via a digital marketplace: the stock exchange.

On the stock exchange, you can buy shares from other people. If you want to buy shares of a certain company, you place a buy order on the exchange. If someone else wants to sell the shares of that company, and you agree on prices, your orders are matched and you buy the shares of that other person.

In reality, most people do not trade directly on the stock exchange, but via a broker. Stock brokers have access to various stock exchanges. You give your buy or sell order to your broker, and your broker goes to the stock exchange for you. You pay your broker for this.

Stock indices

The price of a share can change quickly. This can be related to all kinds of things that are going on around a company. The price movements of an individual share therefore do not say much about how things are going in the industry or the country in which the company is active. If we combine the price movements of multiple shares in, for example, the same country, we can say more about how the economy of that country is doing. We call such a combination an index.

Take the S&P 500 for example . This stock index is a kind of list of the shares of the 500 largest companies in the US. These companies are active in all kinds of sectors. If the value of the S&P 500 falls, this can indicate that things are not going so well in many sectors at the same time. This can be a sign that the US economy is doing a bit less well. That is why you hear people talking about stock indices more often on TV than about individual shares: an index can provide valuable information!

This article was written in collaboration with investment platform DEGIRO.

The information in this article is not written for advisory purposes, nor is it intended to recommend any investments. Please be aware that facts may have changed since the article was originally written. Investing involves risks (e.g. price volatility, currency or liquidity risk). You may lose your invested money. You should take your knowledge and experience into account when making investment decisions. Past performance is not a reliable indicator of future results. Markets are volatile and may fluctuate significantly due to economic, political, regulatory or other developments.