Australian Bond Exchange

The shares/stocks represent the ownership of a company. If that company has issued 10,000 shares and you own let’s say 100 shares, this means that you own 1% of that company. You are a shareholder.

Some companies only have a few shares, others have millions of shares and hundreds of thousands of shareholders or owners. One of the main reasons for a company to sell its shares is to get finance and gain excess to cash. Maybe they want to grow, buy a new building, start a new product, there can be many reasons for this. The company can also issue more shares (additional capital raising) which gives it additional cash without the need or obligation to pay it back in the future. (Very different from debt which must be repaid!)

So why would anyone want to purchase shares?

For the same reason you might go into any business: To make money.
If you own 1% of a company, you own 1% of whatever it earns after it’s paid all its bills. Normally some of those profits will be paid to you as dividends. The rest will be put back into the business to do more work, grow the company and make more many for its shareholders. However, there is no guarantee that you will receive a dividend and there is no obligation for the company to return profits to shareholders.

The size of a dividend depends on the company and how much it earns. Some companies pay out a substantial portion of their earnings as dividends and other pay only a tiny portion of their earnings or none at all. Qantas for example, made $688 Million in the first quarter of 2016 and paid only seven cents per share in dividends.

Most companies try to pay dividends regularly and as a rule of thumb Australian companies pay twice a year. (BHP for example has paid its 375th dividend just recently!)

The board of directors decided what dividend will be paid and when (remember there is no obligation to pay dividends!). These directors are the shareholder’s representatives. The shareholders get to elect the directors at the AGM and ordinarily they get one vote for each ordinary share they own.

The price of the shares will change driven by supply and demand. If a stock is in demand or popular, the price goes up because more people want to buy from fewer people who want to sell.

When a company first offers or ‘float’ its shares a specific price is set. At that point, the investors are buying direct from the company or the so called Primary Market, before it is listed. Once that stock is sold the first time and listed on an Exchange (the so called Secondary Market), the price of that company is no longer fixed. It’s determined by supply and demand through the automated trading systems on an exchange like the ASX.