Module 10 · Investing
Stocks: owning a piece of a company
What a share is, why the price alone says nothing about size or value, how market capitalisation, dividends, buybacks and the P/E ratio work, and how shares reach the market.
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In this lesson
- Explain what a share gives its owner and why the most you can lose is what you paid
- Calculate market capitalisation, total return from a share, and the P/E ratio
- Explain how dividends and buybacks return money to owners, and why dividends are not free money
- Describe how an IPO and a stock exchange bring shares to investors
Jure, 24, hears at work that Company A’s share, at €500, is “expensive”, and that Company B’s share, at €25, is “cheap”. He wants to buy B. Is a low price per share a reason to buy?
What a share is
A company can be cut into many equal slices. Each slice is a , called a in the US. Owning shares makes you a part-owner: you share in its profits, usually get a vote at the owners’ meeting, and your share price rises or falls as buyers and sellers change their view of the company’s future profits.
An owner’s return has two parts: the change in price and any cash paid out. If the company fails, your share can become worthless, but you cannot lose more than you paid. That protection is called limited liability, and it holds for ordinary shares bought without borrowing.
Size and price are different things
A share’s price depends on how many slices exist. The size of a company is its : share price × number of shares.
The , or P/E, compares the price with the company’s yearly profit per share (earnings per share, EPS): P/E = price ÷ EPS. A P/E of 20 means you pay €20 for each €1 of yearly profit.
How companies pay their owners
Companies can pay out profit as a , cash for each share. They can also keep profit to grow, or buy back their own shares.
- Dividend yield = yearly dividend ÷ price. A €3 dividend on a €60 share is 5%.
- On the ex-dividend date, the price usually falls by about the dividend, because that cash left the company. Dividends are not free money, and they can be cut.
- A buyback shrinks the number of shares. With €1 billion of profit and 100 million shares, EPS is €10. After buying back 10 million shares, EPS is €1 billion ÷ 90 million ≈ €11.11, because each remaining share owns a bigger slice.
From private company to your screen
A private company can sell shares to the public for the first time in an (initial public offering). After that, its shares trade on a , a regulated marketplace where buyers and sellers meet. New listings can swing wildly, and a big jump on day one means buyers are paying a high price.
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