What a stock is

After this lesson you can explain shares, float, splits, dividends and buybacks — and you'll know why a €900 share can be cheaper than a €2 one.

A piece of the company

A share is a fraction of ownership in a company. Own a share of Heineken and you own a very small but entirely real slice of the brewer: a claim on that fraction of its profits and assets, and a vote at its shareholder meeting. The number of slices a company is cut into is its shares outstanding, and multiplying that count by the share price gives the market capitalization, the price tag on the whole company. Keep those two numbers together in your head. A share price on its own will mislead you fairly quickly.

A related count matters for traders: the float, the shares actually available to trade once you exclude founders' locked-up stakes, governments and other holders who aren't selling. A small float means fewer shares available, so the same buying urgency travels further up the order book (course 2's mechanism). That's why small-float names move so fast in both directions.

Where shares come from, and where your money goes

At the IPO (the initial public offering) the company itself sells shares to the public and receives the money, once. Every trade after that, including all of yours, is between investors. When you buy 200 shares of a listed company, the company gets nothing; your money goes to whoever sold to you. (Companies can return to the well later with follow-on offerings, which is worth noticing when it happens, because it adds slices.)

Splits, dividends and buybacks

Splits. A company trading at €800 declares a 4-for-1 split: your 100 shares become 400 shares at €200. Your stake is worth what it was worth the day before. The pizza was cut into more slices. This is why the price per share, on its own, says nothing about whether a stock is expensive. A €900 stock with few shares can carry a smaller price tag than a €2 stock with billions of them. Whether either one is expensive is a question about the market capitalization against the business behind it, and reasonable people disagree about that daily, which is course 2's point about price and value showing up again.

Dividends. The company pays out cash per share. On the morning it goes "ex-dividend," the price opens lower by roughly the dividend: money moved from the share price into holders' cash balances. Long-term charts are usually adjusted for this, a small fact that will matter when you start reading them in School III.

Buybacks. The company buys its own shares back and cancels them. The slice count shrinks, and each remaining slice is a claim on a slightly larger fraction of the same business.

Check yourself

1. A stock splits 10-for-1 and the price drops from €1,200 to €120 overnight. What happened to your investment? (Nothing. Ten times the shares at a tenth the price.)
2. You buy 200 shares of a listed company. How much money does the company receive? (None. You bought from another investor; the company was paid at the IPO.)
3. Why do small-float stocks move so violently? (Fewer shares are available to trade, so the same urgency walks further up the book.)

The idea this lesson installs

A share price alone tells you nothing; the share count is the other half of every fact.

Next: Course 5 — "The plumbing: brokers, custody and what actually protects you."