The Mechanics of Online Trading in Shares

Shares are now common investments among the general public. This article considers the key defining features of shares that distinguish them from other investments.

What are shares?

In simple terms, shares represent claims on the assets and earnings of a company and reflect part ownership of the company. Depending on where in the world you are, shares may be more commonly referred to by other terms such as "stocks" or "equities".

While owning shares in a company grants part-ownership in the company and reflects a claim on the assets and earnings of such a company, in reality, most shareholders would rather not have to exercise that right, since the claim on assets only becomes relevant in the event that a company goes bankrupt. Even then, in the event of liquidation, the claims of those who hold a company’s shares are merely residual claims on the assets of the company. That is, shareholders only get to lay their hands on whatever is left after all creditors have been paid off.

Viewed in this way, the risk inherent in investing in shares becomes apparent. This brings us to the key characteristics of stocks and shares.

What are the defining features of stocks and shares?

Decision-making and voting rights: holding shares grants voting rights, so shareholders have a say in the election of the members of the Board of Directors;

Limited liability for shareholders: for each individual share holders, the maximum value at risk is the total value of their investment in the shares of the company. This means that, unlike in a partnership, ordinary shareholders are not personally liable for the debt of a company in the event of bankruptcy;

Loss absorption for other (debt) investors and other creditors: it is important to understand that shares come last in the ranking of a company’s capital structure and shareholders only hold a residual claim. This means that in a liquidation, shareholders only get back their money if there is anything left over after creditors have been settled. In most cases, the shares are usually worthless in the event of bankruptcy or liquidation;

Uncertain returns: while many companies pay out dividends to shareholders, there is no obligation on companies to do so. Indeed, there is no guarantee of returns in any form to shareholders. However, in return for this degree of uncertainty and risk, shares carry higher expected returns over the long term than most investments. This forms the basis of the relationship between risk and return for investors in stocks and shares.

In the following article, we assess the factors that drive changes in share prices and examine the mechanics of online stock trading.

Understanding the fundamental drivers of share price movements paves the way for assessing the likely reaction of investors to the endless news-flow that trigger day to day price movements. Untold success in the stock market awaits those who manage to gain sufficient insight into the mechanics of what moves the pries of shares.

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