Let's Talk Shares!

You would have heard adults talking about shares or the stock market. They are a favourite and frequent conversation topic among grown-ups - just as much as you would debate about the latest music or movie sensation in town. You probably don't know what shares are exactly, but you would have an idea from the reactions of the adults that they can bring tremendous joy or great grief - and it all has to do with making money (that's bringing joy) or losing money (that's bringing grief)!

Like when your mother is pleased with the stock market and nothing can spoil her good mood, not even when you accidentally break her favourite casserole dish. But if she has lost money in the stock market, you know to stay clear away or she would pounce on you for even the way you sit on the sofa!

Well, if you're slouching now, sit up! Read on so that you can understand shares. You already know the two smart moves you could do with your money - first, to start saving and second, to invest your savings to make your money grow. Well, buying shares is one of the ways to invest your savings.

What are Shares?
Ownership of companySo, let's get started with the basic question, "What is a share or what is a stock?" Stock or sometimes called equity, is ownership of a company. Shares of stock represent pieces of ownership of a company that are sold to the public (like your parents or any adult who is interested to buy them). Here in Malaysia, the words 'share' and 'stock' are sometimes used interchangeably to mean the same thing.

When you buy shares, you are buying a proportion of the ownership of a company, and you become a shareholder of the company, or part owner of the company. For example, let's say a Mr Bong owns a sports shoe company called Nikee Shoes where he has divided ownership into one million shares of stock. If you buy 1,000 of his shares, you thus own one-thousandth of Nikee Shoes. Likewise, if your mother has bought some shares of the real company KFC Holdings (Malaysia) Berhad, you can go around telling your friends that mum owns a slice of their favourite fast food chain KFC, and you will be telling the truth!

But for you to be able to buy some of its stock, a company must be willing to sell some shares. So the question that probably pops up in your mind is why would a company want to sell part of its ownership? We ask you, why would anyone sell something? To get money in return, right? So it is with a company selling its stock. A company needs money (or what is known as capital in economics) to carry out its business.

Raising money

Let's go back to the example of Nikee Shoes. After a few years making athletic shoes, Mr Bong wants to expand his business by manufacturing casual shoes that produce(can squeak out) the latest hip tunes. He thinks it is a great idea that will be a hit with the younger population but he needs more funds/capital to manufacture them. There are, of course, many ways to raise the additional capital that he wants: sell some property, borrow the money from the bank (the interest rate might be too high) or he could use savings that the company has set aside from
the profits earned earlier. If any of these options doesn't appeal to Mr Bong, he can opt for another way to raise the funds he needs - by selling a part of the ownership of Nikee Shoes through selling some shares of its stock. That's why a company would give up part of its ownership.

Initial Public Offering or IPO

When a company first decides to sell part of its equity, it determines a suitable price for that amount of shares based on the company's worth, and offers to sell those shares to the public through what is known as an Initial Public Offering or IPO. Thus the public first gets to buy the shares of a company or to first become shareholders of a company through an IPO. The money that these shareholders pay for the IPO shares - that is, the funds raised from an IPO - goes to the company for financing its operations. Referring to our example of Nikee Shoes, let's say that Mr Bong has worked out that he needs RM100,000 to manufacture the casual-musical shoes. So what does he do? He offers 10,000 shares of Nikee Shoes to be sold at RM10 a share in an IPO:
10,000 shares x RM10 a share = RM100, 000. (That's the amount of capital needed to manufacture the musical shoes).

In this way, Mr Bong gets the funds he needs to finance his musical shoes venture. However the sacrifice that he has to make to get those funds is that after the IPO, he no longer owns every inch of his company. Now 0.01 per cent (10,000 shares divided by 1,000,000 shares) of Nickee Shoes is owned by others. But the way Mr Bong has thought it out - giving up a tiny part of the equity is nothing compared to the tons of money that he fervently believes his musical shoes will rake in for him!