What is a Share?

The question as to how to define a share is one that even many investors find puzzling, and while instinctively it may seem obvious as to what a share is, expressing the concept in words is something most investors find tricky. As a commodity that is traded openly, shares are just like any other - they have a price that varies in accordance with supply and demand, and as such should be bought when demand look set to rise and sold when supply looks set to outstrip demand. But getting down to the nitty-gritty of what a share actually is takes an analysis that is somewhat more complicated.

example of a share

Definition of a Share

A share, at is lowest level, is a share in the profits of the company to which it relates. It is a percentage of ownership in the company, relative to the size of the holding and the total available share capital, and as such, it provides the owner with a proportional right to the declared profits of the business. In this sense, shares provide the bearer with a yield whenever dividends (i.e. payments to shareholders) are issued. Regardless of whether you're a long-term investor who has held the same shares for decades or you purchase on the day of a dividend declaration, the bearer of the share is entitled to a per-share payment from the dividend pot, thus share investments provide an ongoing return in exchange for the capital invested.

How Shares are Priced

The price of a share is determined by its notional value, plus a premium in respect of the actual value of that right to ownership. Thus, a £1 share may actually sell for £5, if it is assumed that the value of that proportion of ownership in the company reflects that price. With pricing stipulated exclusively by supply and demand, it is therefore possible for shares to be both under and over priced, depending on the dynamics of the market and the levels of optimism shown by investors at a given point.

But beyond the right to a stake in the company's profits, shares also present more complex rights and responsibilities, upon which shareholders may or may not act. The most obvious of these rights is the right to vote on company decisions, and to take an active role in the election of the organisation's management.

If a shareholder feels the current board are not fit to serve the company's best interests (or even their own best interests as a shareholder), they have the ability to vote in a replacement board, weighted in respect of their holding. Even as minority shareholders, there are protections afforded in law to ensure fair treatment and to give the shareholders their right to a say in company management.

Of course, it goes without saying that the majority of shareholders are more concerned about the value of their shares than the day to day running of the organisation, and speculators seldom delve deeper to exercise their correlative rights. However, in the strict legal sense of the definition of a share, ownership brings with it the burden to exercise control and influence over the direction of the company for the good of the business, other shareholders and the variety of stakeholders in the company's business.

Shares are essentially packages of disparate rights, but more often than not they are used primarily as a tool for trading and speculating on price fluctuations.

Before trading shares it's important to understand who traders shares and why.