What are shares? stocks?

I've experienced people saying that to me alot of the time. Now I finally get the chance to explain them, my way. :)

Imagine if you have a company. And then you and your friends share money to first start up that company. But each of you give different amounts of money into that first start up. Assuming everyone contributes the same, and ceteris paribus(meaning all else equal as the latins like to call it), then each of you are entitled to different amounts of the company's profit, well... assuming it does make a profit later on.

So how do you keep track of the profit dividings? One of the easiest ways is by issuing or 'giving out' shares to shareholders or members of the company. Now the company's profit can be divided according to the number of shares you own. Yes, it's actually an invention and the invention of a person that the whole idea of shares came up. Brilliant? Well, I certainly think it is.

Now, consider the case 2,3 years down the road when your company is already successful and expanding rapidly. Many people are attracted towards your company, maybe your friends or relatives. They want a share in the company's profits. Now you can consider selling part of your company. How do you do that you ask? Simply by issuing more shares. Its up to you and your fellow board of directors how much to issue each share for. So by buying the shares, your friends or relatives get to own a stake in your company. What you get out of it is the money raised by issuing more shares, which can be used in the future to raise even more cash. Thats an investment in itself.

What if someone wants to quit the business and no longer wants to become the owner of the company? Easiest way is to sell their shares and they "immediately" pass on the ownership to someone else.

Pretty handy?

Another analogy to think of shares is the cake analogy. Imagine all the shares of a company as the cake. The more shares you have, the bigger slice of the cake you get. Similarly, when a company makes profits, you are entitled to a bigger slice of the overall cake. And smaller shareholders are entitled to smaller profits of the company. If you're the only shareholder of the company, you can gobble up the whole cake for yourself!

Boy that cake does make you hungry doesn't it?

Hope you all have learnt something informative and had fun reading my first episode of "Shares? What are they?"