What Is A Share?

Published in Investing on 20 April 2012

Our new beginners' series continues by outlining what a share is.

If you're new to investing, then one of your first questions will doubtless be "What is a share?" Well, let us begin with a brief history lesson.

It all started back in the early days of the empire, when there were great profits to be made if you could get together the cash for a ship and crew, and send it off to far-flung places to hopefully come back laden with tea, spices, silks or all manner of other luxury goods that the wealthy back home would pay large sums for.

Only the really well heeled could afford such an undertaking on their own, and even then it was such a risk that many didn't want to shoulder the whole burden. So merchants would get together, in coffee shops or other public venues, and pool their resources. The cost of an expedition would be split a number of ways, and each partner would take a share in the enterprise according to how much they could afford and were willing to risk.

They'd write out their documents of ownership, so when they ship eventually returned with its bounty, they'd be able to share out the rewards appropriately.

That expanded into sharing the costs of investing in all sorts of businesses, and people soon realised that their ownership documents, which were the equivalents of more modern share certificates, had values of their own without waiting for the ships to come home (or whatever other enterprise to dish out its profits). If they wanted to sell their share in a venture, all they had to do was agree a price with a buyer and hand over the certificate.

How it's all changed

And today, apart from the technology, little has actually changed. A coffee shop known as Jonathan's in London is thought to have been the first to start posting lists of prices for available shares (and commodities), and is considered the first stock exchange.

Today, when you invest some of your money in, say, Tesco (LSE: TSCO) or Vodafone (LSE: VOD), you're harking back to the days of those early partners who shared the risks of those expeditions, except now you're one of many thousands of investors who own a share in the venture.

Share certificates have now mostly disappeared, but its only quite recently that we still used them regularly.

Did you take part in any of those early government privatisations? I did. In fact, the very first shares I owned were in BT (LSE: BT-A). I got a minimum allocation of a few hundred pounds, sent off my cheque and waited for the certificate to arrive.

When the time came to sell, I had to post the certificate to my bank, wait until the end of the next month for it to be settled and pay a fairly high commission to them for doing it.

Computer trickery

Today, share ownership is mostly recorded electronically and, instead of a paper certificate, you have an entry on a computer in what is known as a nominee account. The broker is listed as the official shareholder with each company, and holds the shares on behalf of its clients. That way, you can check prices and buy and sell online at the touch of a mouse. The commissions are much lower now, and you can find online brokers who will charge you as little as £10 per transaction, even if you're investing thousands of pounds.

And, of course, news of our companies is much easier to come by these days. If your ship sank off the coast of Zanzibar, it could be months before you found out. But if Tesco's sales falter, you'll get to know pretty much immediately -- as quickly as anyone else, at least.

Next time, we'll look at actually setting up an account with one of these online brokers, using the Fool's ShareDealing service as our example. We'll guide you through the steps needed to get your account up and ready to go, to transfer money in, and to actually make a purchase. 

More in the Investment For Beginners series:

> The Motley Fool owns shares in Tesco.

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Comments

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CunningCliff 20 Apr 2012 , 10:23am

Best answer ever to "What is a share?":

Investment guru Peter Lynch once remarked: "Although it's easy to forget sometimes, a share is not a lottery ticket... it's part-ownership of a business."

My son (now 10) has understood this since he first started investing in 2005. :0)

Cliff

TMFBoing 24 Apr 2012 , 10:15am

Yep, that's a great quote.

Alan

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