Key takeaways
- A stock (or share) is a fractional ownership claim on a company, you are a part-owner of the business, not a lender to it.
- Common shares carry voting rights and a residual claim on profit and assets; preference shares usually give up voting rights in exchange for a fixed, priority dividend.
- A stock's price is set by what buyers and sellers currently expect the business to earn in future, which is why it can move independently of the company's latest reported profit.
What owning a share actually means
When a company incorporates, its ownership is divided into shares. Buying even one share of a listed company makes you a part-owner of that business, entitled to your proportional share of any dividend the board declares and, in principle, a say in matters put to a shareholder vote.
This is fundamentally different from lending money to a company: a shareholder has no fixed repayment date and no guaranteed return, the upside is open-ended if the business does well, but so is the downside if it doesn't. Shareholders also rank behind lenders and other creditors if a company is wound up, which is the trade-off for that unlimited upside.
Common shares vs preference shares
Most shares traded on PSX are common (ordinary) shares, which carry voting rights and a residual claim on whatever profit and assets remain after all other obligations are met.
Preference shares sit between debt and common equity: holders typically receive a fixed dividend ahead of common shareholders and rank higher in a wind-up, but usually give up voting rights and don't share in extra upside the way common shares do.
How a stock's price is set
On PSX, a stock's price is whatever the last matched trade on KATS says it is, the outcome of buyers and sellers continuously placing orders at the prices they're willing to deal at.
Because a share represents a claim on a company's future, not just its most recent results, the price moves on changing expectations for earnings, growth and risk, which is why a stock can rise on bad current-year results (if the market expected worse) or fall on good ones (if the market expected better).
FAQs
Is "stock" the same thing as "share"?
In everyday use on PSX, yes, "stock" and "share" are used interchangeably to mean a unit of company ownership. Technically, "stock" can also refer to a company's total issued capital as a whole, with "shares" being the individual units of it.
What do I actually get for owning a share besides a possible dividend?
A proportional claim on the company's net assets, voting rights on matters put to shareholders (for common shares), and entitlements in corporate actions like rights issues and bonus shares.
Can a stock's price go to zero?
Yes, if a company becomes insolvent, shareholders are paid only after lenders and other creditors, and are frequently left with nothing.