Own a share of the company
Shares represent an ownership interest in a business. Its customers, costs, debts and decisions affect that interest’s value.
← new sharesCompany
← existing sharesSeller
The company receives no new capital from this trade.
Size the stake and check its rights
In an invented company with 10,000 identical ordinary shares, owning ten gives 10 ÷ 10,000 = 0.1% ownership. Stocks, shares and equities commonly name this interest. A ticker identifies a traded security; its quoted price records what buyers and sellers will exchange it for.
Ordinary shareholders generally vote on matters such as electing directors, but rights differ across share classes and jurisdictions. A small stake confers neither day-to-day control nor a right to take a particular machine or withdraw part of the company’s bank balance.
Separate profit retained from cash received
Future profit and value depend on productive use; no matching cash payment to the shareholder.
The amount depends on decisions and rights; ordinary dividends can fall or stop.
After costs and obligations, a company can retain profit or distribute it. Retained profit benefits owners only if used productively; it is not cash already received. An ordinary dividend can be reduced or stopped; it is not contractual interest.
Apply total return to one share
Invented one-year holding bought for €20: no further purchases or withdrawals; costs and taxes excluded. An ending €22 share plus €1 dividend gives €23, a €3 gain: (€22 + €1 − €20) ÷ €20 = 15%. The unsold share’s price can still change.
If that share instead ends at €16, the same dividend gives €17: a 15% loss. A non-dividend-paying company can produce a positive return through its price. Business profit, dividends and your return differ; the price you paid matters, and retained profit gives no equal cash entitlement.
Higher profit can meet a lower price
Same scales in both rectangles: width = annual profit per share; height = price paid per €1 of annual profit. Area = share price.
Investors now pay less per euro of profit, outweighing the earnings increase. The original price may have assumed stronger growth. Recognising a good product or successful business does not settle what to pay for its shares; others can recognise it too.
Use P/E as a relationship, not a buying threshold
Price-to-earnings, P/E, divides price by a measure of annual earnings per share. Here €50 ÷ €2 = 25; later €2.40 × 15 = €36, and (€36 − €50) ÷ €50 = −28%. The multiples are invented, not trading thresholds or an interest rate paid to shareholders.
Growth expectations, uncertainty and investors’ required return affect the multiple. Profits may contain unusual items, forecasts may be wrong, and low multiples may reflect serious problems. No single ratio establishes a bargain or predicts the next price. A price change alone cannot establish whether the business improved.
Shareholders stand behind priority claims
Lost customers, competition or unserviceable debt can damage a company. Ordinary shareholders receive what remains after creditors and other priority claims; failure can leave them nothing. Profitable, familiar companies can also suffer large price declines. Waiting longer does not guarantee recovery.
Distinguish an outright purchase from borrowed exposure
With shares bought outright using your own cash, no borrowing and no attached obligations, you can generally lose the amount invested. Borrowing adds separate repayment obligations; ordinary ownership does not require it. A long horizon guarantees neither survival nor recovery of the purchase price.
Spread ownership without selecting each company
A fund can hold shares in companies for you, reducing individual-business research. Its actual holdings determine coverage: a few similar businesses differ from a broad spread across industries and countries. A fund label alone guarantees neither breadth nor protection.
Spreading holdings reduces dependence on one company’s survival, not a broad fall in share prices. Money for a particular spending date remains uncertain. The next lesson changes the claim from ownership to lending.