in its latest of our jargon busting
videos I'm gonna explain exactly what a
share is and how investors and traders
hope to make money hello I'm David Jones
and his latest jargon busting video with
trading two-one-two last week we talked
about what a currency pair is I thought
this week let's explain it's taking it
right back to basics and explain what a
share is if you buy a share or sell a
share what is it you're actually doing
what makes up a company's share and the
easiest way of explaining it if you have
even one share in a company you're a
part owner of that company but let's use
a really simplistic example first of all
just to highlight how it all works so
let's look at a very simple and very
fictional example to explain how this
works let's say I decide to start a
company and I want to raise some cash to
help me get started and talking to
customers and all that sort of thing so
and I value my company at the beginning
because it's a start-up and it's never
actually done anything at ten thousand
pounds and to raise some cash I want to
sell off some shares so I'm going to
split the company into a thousand shares
now I want to retain control of the
company so let's say I'm gonna keep 60%
of the shares but I make the other 400
shares available to be bought by people
who want to invest in my company so if
there's a thousand shares and I'm
valuing the company at ten thousand then
it's ten pound a share you decide to buy
a hundred shares so you think this
company might be a good idea so you buy
a hundred shares at ten pound a share so
in this example you've invested a
thousand pounds so there are a thousand
shares in circulation 600 of them are
still with me but you own a hundred
shares so you are a part owner of the
company that's that's what buying shares
if you break it down to its most basic
level is all about so if you own a
hundred shares and there's ten thousand
a thousand sorry in circulation you're a
ten percent owner of the company okay so
you'd be entitled if I pay a dividend
out to be entitled to maybe you know its
share of the profits in that way if the
company does well in theory its value
should increase for all
10,000 pounds so you should see the
value of your shareholding grow and the
way of course it works in the markets is
if you've made a profit you've made a
loss so you just change your mind it's
very easy for you to then sell your
shares on to somebody else I don't get
the benefit of that of course if you go
and sell your shares onto somebody else
I don't see that money it's you getting
that money but when you own a share or a
number of shares in the company you're a
part owner of that company of course
let's take Apple as an example that's
worth many hundreds of billions if you
have a thousand pounds worth of Apple
shares and of course you do technically
own part of Apple but a thousand parents
is such a small shareholding you can't
really march into their head office and
say you don't like the look of the
iPhone 10 you think they're selling it
too expensive okay so you're a very
small shareholder in that example okay
so it all depends on the size of the
company and how much you invest of
course as to how much that company you
end up owning so if you buy some shares
in my company you own part of that
company clearly investors and traders
alike if they buy shares they want to
make money they want to see a profit so
there are a couple of ways that both of
these can profit from share prices so
let's take a quick look at that let's
look at how people you know will try and
make money from shares so one way
particular particularly for longer-term
investors one way they'll try and get
income off their shares is by dividends
as a part owner of that company I'm
entitled to a share of the profits if
the directors the company decide to pay
a dividend so let's say I've had a good
year in my new business and I decide to
give everybody a dividend of 50 pence so
50 pence for every share they own okay
so in the example where you bought a
hundred shares you'd be entitled to a
hundred times 50 P as a dividend for
your shares so getting dividends is one
way that shareholders would get a
portion of the profits of course the
company may decide not to pay a dividend
they may think well actually we were
better off hanging onto his money and
using it to grow the company that's
particularly true of sort of
fast-growing technology companies they
can plow that money back in reinvest it
and hopefully grow the business even
more
maybe more established companies will
always pay out at least something as a
dividend so that's one way we can see a
profit from our shareholding the other
way and of course the main way people
look to profit from share prices
it's the share price going up you know
if we paid in the example 10 pounds of
share let's say I've had a really good
year and I've beaten expectations and
profits are through the roof and all
this sort of stuff the company's doing
really well
well maybe the shares that you paid 10
pounds for because it's been such a good
year they're now trading at 13 pounds so
if you wanted you could sell your
shareholding and make a 30% profit ok so
there's an example where the share price
has gone up of course if the company
does badly then the share price may well
fall so your shares may fall 2 to 7
pounds a share then it's up to you or do
I want to hang on to see if the good
times come back or do I want to take my
loss get some of my money out and look
for a better investment but share price
growth you know when we see charts like
that
that's the traditional way that
particularly traders and of course you
know longer-term investors as well the
dividends are good but it's the share
price growth that can and deliver I
think the real stellar returns so that's
how it works in theory let's have a look
in the real world it's a look at two
companies share prices with very
different fortunes over the last 18
months or so and see how it would have
panned out for investors in both of
these companies let's take a look at
Netflix you can search for it if you're
on the platform by not surprisingly
taking this type of this name into the
search box you'll see there are two
options you can trade it as a CFD
contract for difference using leverage
or if you want to you can buy the
physical shares so that's where you
don't have any leverage for now let's
just stick with the CFD and take a look
at the charts okay so we've gone back in
time
it's September 2016 you think the
Netflix is going to take over the world
and we're all going to be watching
streaming videos every hour every day so
you decide to buy some shares in Netflix
they're trading around about $100 a
share so if you decide to buy in let's
say you buy buy 10 shares so you end up
with
thousand dollars worth of shares this
jump to the present day so you're buying
down here about $100 a share back in
September 2016 and you'll see since then
the share price has just continued to
move higher so you bought 10 shares at
$100 a share or 10 CFDs or $100 a share
and it's a smooth higher and higher
you've more than doubled your money at
the time of recording this the share
price was trading around about 270
dollars a share
so the thousand dollars that you put in
if you sold out now you get back about
two thousand seven hundred dollars so
you've made one thousand seven hundred
dollars because Netflix has done well
the share price has done well what's
also interesting here look at this gap
here we've recently had earnings from
Netflix so companies on a regular basis
you know typically quarterly
particularly in the US will announce
their profits for the previous three
months you know how things going what
their expectations are that sort of
thing Netflix is latest earnings report
it ended up adding more subscribers than
the market you know market analysts
investment banks were expecting so we
saw a really big jump there we go so
just before the earnings they were
trading at 227 they beat expectations in
terms of subscribers the share price
opens up almost 10% higher the next day
so you can see you know how if a company
is doing well including their share
price to do well if they end up doing
even better than expected you know it
can really put something of a rocket
under the share price so there's an
example of how we would have made money
owning at a tiny tiny part of Netflix
because the company did well so the
share price increased in value let's
look at one that didn't go so well
alright we've gone back in time again to
September 2016 what we're looking at
here this is the share price of Karelian
so a UK listed company big construction
business big services business in the UK
so you decide the trading room at 2
pound 50 is share so you decide again to
put your your thousand pounds this time
in Karelian so at 2 pound 50 a share if
I can just do the math in my head you
buy 400 shares at 2 pound 50 a share so
400 times 250 is a thousand pounds
invested and
so you think the company's had a bit of
a tough time but it's gonna turn it
around let's fast-forward to the present
day well this it definitely hasn't done
as well as the the Netflix investment so
we were buying in here at two point
fifty a share the share price hardly
went up after we bought it just slid
came out with bad news that big gap
there you can see we had the gap going
the other way Netflix big gap here and
Karelian gapped down results clearly
worse than expected and at the latest in
during January 2018 the company went
into liquidation so technically well not
technically you've lost everything so
you put a thousand pounds into the
shares you saw the shares slide you
decided not to get out you're gonna hold
on thinking was going to turn around it
didn't end up turning around so even
though you own part of the business the
business at the moment doesn't exist
anymore so your shareholding is worth
zero so the Netflix shareholder very
happy sitting on a real chunky return
the other shareholder probably wishes he
or she had never heard of Karelian in
the first place as the company has just
gone into liquidation but that shows I
think the pros and cons of buying shares
also I think whether you're an investor
or a trader you need to have a strategy
for getting out if things don't turn out
quite as you planned you saw on the
trading platform there for Netflix for
example there was the the CFD the
contract difference and the share price
as well the physical shares so you can
actually trade or invest in both will
cover CFDs in the future but it's a way
of trading using leverage but on trading
- and - you can actually buy and sell
the physical shares as well and there's
a zero commission deal so go to their
website to find out a bit more about
that but that's some explanation shares
for this week as usual if you have any
questions or comments or you still not
sure leave us a message in the comments
down below we do read all of them if you
liked the video click on the thumbs up
and if you're not subscribed we do lots
of different videos crypto currencies
technical analysis trading strategies
all this sort of stuff so if you're
seeing this for the first time if you
click on the subscribe button there and
just make sure that alarm
notification icon thing down there has
been clicked and you'll get notified
every time we upload a new video but for
this week from me David Jones and
trading 2 & 2
we'll leave it there and I hope you have
a good trading week