Published on : 19 June 20203 min reading time
The stock exchange is a market with buyers and sellers. We all know the Sunday market where we buy natural products such as fruit, vegetables or fish, and well on the stock exchange market, it is not natural products that we buy but financial products. Financial products are not fruits, vegetables or fish as you may have guessed, they are for example stocks, bonds or other products that we will talk about later so as not to go too fast. Let’s stay for the moment on stocks to explain the logic of the stock market.
What exactly is a stock?
To understand what a share is, imagine a company that wants to grow strongly, for example a company that makes a new model of car that can run without fuel. This company needs to buy new machines that make it possible to manufacture more cars and faster. There are three ways to pay for these machines:
Solution 1: Have a lot of money saved (which is not always the case).
Solution 2: Take out a loan from the bank (with the obligation to repay the amount and pay interest every year, hence the disadvantage).
Solution 3: Putting part of the company’s capital up for sale in the form of shares (company capital = walls, land, machines…). The advantage of this solution is that the company does not have to repay the money, unlike a bank loan or a bond, the disadvantage is that the owners’ control over the company is weakened.
To sell this capital, it must be divided into several equal parts, this is what we call shares! A part of these shares is kept by the company and the other part is sold to shareholders (you and me for example), but the biggest part of the shares is kept by the company so that it remains the majority shareholder. This is important to keep control of the company because the shareholders have power over the company, in other words, having shares means owning a part of the company and the more shares you have, the more power you have!
In fact, as soon as you are a shareholder, you have the right to participate in the company’s general meetings, which most often take place once a year. During these general meetings you have the right to give your opinion on the company, the right to vote for or against certain decisions and this is possible even if you only hold one share! This power increases according to the percentage of shares you hold. The advantage of selling your shares is that the company does not have to pay back the shareholders’ money, the disadvantage is that the owners’ control over the company is weakened. The shareholders, in order to leave the business, must find new buyers who are willing to take their place, so the business has nothing to repay, unlike bonds or bank credit.
Bravo! Now you know what a share is!