Let me make sure I've got this right...

[Ben Clarke]

OK, so my dad decided to play the stock market. I didn't really get it, so he kind of explained it, and this is what I pieced together.

If I start my own company, and someone buys 10% shares, and I make £1,000,000 profit, at the end of the year, I give them 10% of the profit. If someone buys another 5%, I give the original shareholder their 10%, and the newcomer their 5% at the end of the year.

Am I getting this right, or am I missing something?

[WhiteLotus]

i think so yes

[JrRacinFan]

Yes, Ben. That is correct.

[Ben Clarke]

OK, thanks. At least now I know that I'm not as stupid as I thought I was.

[Sasqui]

For a private company that's typical, but for public or private firms or companies with articles of incorporation that have different rules, the payout on profit can either be calculated differently, or determined by the board of directors for a given fiscal term. Sometimes, the determination is based on some rather weird factors including performance or expected performance for the future.

Wow, did I write that? :)

[Ben Clarke]

Nah, you copied it from Wikipedia.

[Sasqui]

Nah, you copied it from Wikipedia.


I actually did write that from scratch. :cool:

[EnglishLion]

Buisness Example:

1. You decide to start your own business, selling computer systems. You go to a bank to get investment, setup the business, become successful and make profit.

2. You want to expand, so you form a partnership with a rich friend and between you, you expand and open another shop in the next town.

3. Things are going very well so you want to open lots of shops. You need a lot of investment but you don't want lots of partners as they all want to run the shop too! So you sell shares to investors. By buying the shares from you, you gain money to invest and open a chain of 25 shops. The investors hold the shares and you give them a dividend (a yearly payment based on company performance).

4. If lots of other people decide they want to own shares in this great company then they buy these shares off current shareholder who may be willing to sell. They may have to pay a high price though to convince the current holder to sell. If so then the shares have gone up in value, if this keeps happening then the shares go up and up.

5. However, if the shares rise a lot, then some shareholder will decide that they want to cash in as the shares are now selling for much more than they originally paid. They get a good return on their original investment (yearly dividend + gain from shares increase).

6. If the company does badly however, then the shares start to fall. Often shareholders will then jump ship and sell to avoid holding shares that are on the downslide, when they do this it further encourages the drop in price. Until the shares are so low that people think they are worth a risk and buy them up.

That's the basics

People buy shares to invest long term (yearly dividend). Or they play the market, buying shares that they expect to go up, then selling when they do. People looking for a good dividend (smaller gradual profit) will often look at safe shares, in banks and other relatively safe companies. Those trying to play the market for huge profits will often invest in small companies that might suddenly make it big (mines, small oil prospecting companies, new technology, biotech, internet etc)

You can also invest money in companies that will in turn buy shares for you - let someone who knows what they are doing handle it. They will then spread the money they invest across many companies to try to minimise the risk.

NOTE. if it all goes wrong, you can loose everything you invested. It's much riskier than a savings account.