Juan:'I'm thinking about investing my money in the stock market and buying some shares. The problem is that I have no idea about it. For example, what's the difference between stocks and shares?'
Peter:'Basically, they are the same thing. They mean the ownership of part of a company. In Britain, we normally say shares, but in North America they use both.'
Juan:'Can I buy shares for any company in the world on the stock market?'
Peter:'No, you can only buy stocks and shares on the stock market for public limited companies (called 'public corporations' in America). These are generally big companies which allow anybody to buy shares in them. In fact, only companies which are public limited companies are on the stock market. The majority of companies in the world are private limited companies (called 'private corporations' in America), which don't sell their shares on the stock market.'
Juan:'So, how do I buy stocks or shares in these public limited companies? Can I do it myself by calling the companies?'
Peter:'No, you don't have the permission to buy shares yourself, you have to get a stockbroker to buy or sell shares for you. A stockbroker is licenced/registered to trade stocks and shares (which means to buy or sell stocks and shares) on stock exchanges. So you have to set up an account with a stockbroker.'
Juan:'Ok. So what's the difference between a stock exchange and the stock market?'
Peter:'The stock market means anywhere where stocks and shares are traded, but a stock exchange means an actual location/organisation where they are traded. For example, the actual place/organisation in London where stocks and shares are traded for some companies is called the London Stock Exchange. In New York, you have the New York Stock Exchange and the Nasdaq Stock Exchange. All three stock exchanges are part of the stock market.'
Juan:'So why does New York have two stock exchanges?'
Peter:'There are actually more in New York. Each stock exchange has different companies listed on them. So, if you want to buy shares in Google your stockbroker has to use the Nasdaq Stock Exchange, because that's where Google is listed and their shares are traded. But if you want to buy shares in Ford, your stockbroker has to use the New York Stock Exchange, because that's the stock exchange where Ford is listed.'
Juan:'More complicated than I thought. I would like get a good return from the shares, I want to make a lot of money. Do you have any recommendations on what company's shares I should buy?'
Peter:'I don't know. You should get advice from a stockbroker or look at how a company's
shares are performing. Check to see if the share value has increased or decreased. When
you own shares in a company you will become a shareholder which means you
are a part owner of the company and can vote on who manages or directs the company.
You will also receive a dividend on each share you own, which is an extra payment. If the company is making a profit they normally give some of this profit to their shareholders as a dividend. So your return with be a combination of the dividend and the increase or decrease in the share price.'
Juan:'But can I get a higher return on my money if I put my money in the bank from the interest than from the dividend in stocks and shares.'
Peter:'It's safer to put your money in a bank, but you may make more money with stocks
and shares. If you want to see how much money you earn on each dollar or pound you
have invested, you have to look at the yield. For example, if a banks pays you an
interest rate of 2%, you earn 2% on every $1 and this 2% is called the yield.
For dividends you have to divide the yearly dividend per share by the amount you paid for the share. So, if a share cost you $2.50 and the yearly dividend is 15 cents, you divide 15 by 250. So the yield for the share is 6%. So this shows you would make a higher return on your money from investing in this company's shares than by putting your money in the the bank.'