The lay concept of what a share is may often differ significantly from what, in legal terms, a share actually is.  A share is not a share in the assets of a company directly, nor is it a tangible portion of ownership. A share can be more properly considered to be a number of related rights, traditionally embodied in the form of a share certificate, although modern public trading is conducted electronically. 

Individual shares can be transferred, and are transferred on a daily basis on the major stock exchanges and privately.  Whilst there is no limit on to whom a particular share can be sold in publicly traded companies, most private companies have within their constitution the requirement that either shares be offered to existing shareholder pre-emptively or that prospective buyers must be approved before transfer can commence. 

Shares can also be categorised largely into two distinct types, although there is no specific requirement for a share to be either (i.e. other categories of shares can be permitted by a company’s constitution).  The most common type of share is the ordinary share which has a variable rate of return depending on the performance of the company over a given financial period.  Second is the preference share, which provides a fixed return in preference (i.e. paid before) ordinary share dividends, although the rate of return provided is naturally much less to reflect the lower risk involved in the investment. 

A share comes primarily with the rights to enjoy a portion of company profits in the form of a dividend (usually declared on nominal share value) as well as the right to vote in company meetings.  Of course, most investors don’t avail themselves of these rights and merely approach investing as a short term endeavour.  Nevertheless the rights for shareholders remain, as part of ensuring effective corporate governance and promoting the interests of the particular company in question.

Every share is nominally worth a set amount, that is not variable depending on the particular market climate.  This amount is usually small, and in any case should be far smaller than the amount actually paid for the share on the resale market.  The nominal value of a share is used only in terms of ensuring there is capital in the business from which creditors can be paid, and in the event of insolvency those shareholder who have no fully paid up the nominal value of their share-stock will be liable to contribute accordingly.

The difference between the nominal value and the share price in known as the ‘share premium’, and where this is paid directly to the business issuing the shares it must be ring fenced within a specific share premium account.  The price paid for a share is utterly variable, and this is the amount expressed in stock tickers and on the exchanges, given that this is the amount one would have to pay to acquire an individual share.

Share price is affected by a number of external factors, but at the simplest level it is affected by the demand for that particular security.  Obviously, the number of shares available in a given company is limited at any given point, and thus as more and more shares are bought, the value of those shares automatically increases.  Likewise where those shares are sold and the market becomes flooded with one type of security, the value falls.

Whilst share price is affected by the transactional side of things, indirectly transactions are affected by market externalities and company performance.  In theory, only the performance of a company should impact upon its share price, with those reporting growing profits likely to be in higher demand.  However in all truth, the current state of the marketplace and the economy as a whole has a bearing. 

Take for example the terrorist attacks of September 11th 2001.  Whilst these had nothing to do directly with the performance of many publicly traded businesses, stock markets around the world plummeted as investors sold shares in a fit of panic. 

Ultimately, it is the behaviour of the larger investors that sparks movements in a share’s pricing.  When times are good, share prices boom.  But when the economy starts to turn gloomy, or even when a particular piece of bad commercial news is announced, share prices tend to fall dramatically.

Why Buy?
The main reason to buy at an IPO is that the capital raised from the offering will likely be used to fund growth projects, which in turn will ultimately improve revenues, all going well.  Resultantly, the value of the shares you bought at rock-bottom will increase significantly, giving you a handsome return on resale.  Similarly IPOs are in very high demand from the off, and in some cases even a quick resale will yield a decent return.

Another key advantage in buying shares is that the IPO will be hyped in the financial media, or at least discussed at length, which will create in itself a market for the shares.  By getting in at the ground level you can capitalise on the momentum from the media hype to resell your shares at a profit.

Why Not?
Of course, in an ideal world the reasons for buying at an IPO would far outweigh the reasons for not.  Unfortunately, that isn’t always the case, and it’s important to be wary before you jump in head first.  Whilst the media hype around an IPO may be good for short term value, it might also have the opposite effect.  It’s not unknown for shares to be launched at an inflated value simply because of the buzz around their IPO, which can prove costly for the serious investor. 

Secondly, there is very little in the way of a track record for their share performance, so you have no way of knowing whether a particular price is a good exit point.  Additionally, IPOs generally occur in periods of rapid expansion which has the possibility of causing problems within the business as well as simply turning out successful.  All in all, IPOs can go one way or the other, and for the careless investor that’s a recipe for disaster.

Buying at an IPO might be a good idea, but it depends very much on the company you’re talking about, and the industry in which they do business.  Before investing in an IPO it’s important that you take the time to do your on research on the company and its marketplace, rather than relying exclusively on the judgement of the financial press, and make up your own mind before rushing in with the crowds.

The phrase ‘stock market’ is similar to the expressions of a currency market, or really a market for anything – that is, a place (although not necessarily a physical location) where buyers and sellers meet to do business over a particular subject, in this case ‘stock’. 

Stock refers to company securities in the form of shares, which are best described as proportional voting rights (and income rights) in a particular company.  On the stock market, these are bought and sold for a value, almost always at a premium over their notional value (which represents the extent of liability the shareholders bears to the company in the event of insolvency). 

The stock market works because there is a ready trade in company securities.  That’s because they provide a valuable option for investors looking to realise a return; from large investment funds to the average part-time wealthy individual.  In return for the value of the share, the purchaser can expect to receive the right to transfer the share at a later date for value, along with the right to vote at company meetings and the right to receive any dividend (i.e. profit distribution) declared.  Therefore, buying shares presents a two-fold approach to realising a profit: resale at a higher price, or retention to benefit from annual dividend payments. 

For businesses (or rather public companies), the stock market provides a means by which capital can be raised quickly and fluidly.  As the company goes public, its original owners can make a fortune as their stocks are issued to the investing masses for the first time and snapped up by brokers and portfolios keen to jump on the bandwagon.  The finance raised from the offering is paid to the company which increases the subsequent value of the original stakes held by the private shareholders thus creating wealth for the entrepreneurs and generating funds for the business.

For that reason, companies tend to only move to market where they require to raise funds or where they are looking to expand.  And because of the flexibility of the stock market, it is possible for companies to buy back shares at a later date where finance is less of a concern to preserve capital and improve value for longer term shareholders.

The price paid per share on the stock market is wholly determined by market prices, so to the potential profit available from any particular trade comes as a result of the mood of the market.  Where the market is in a positive, buying mode, prices will generally increase because there is a greater demand for the shares so traded.  Likewise the reverse is true, and where the market is suffering a crisis of confidence, you can be sure that’ll be reflected in the ultimate share price attainable during that day’s trade.  The problem is however that investment firms are so eager to protect client interests that the slightest hint of economic uncertainty can lead to mass panic and cause significant devaluations in a matter of hours.  The stock market never was for the faint of heart!