What are stocks and shares in the modern economy?
In modern terms, we can say that shares are the parts into which the capital of a company is divided. Each individual investor holds a certain number of these equal shares (which are identical to each other): this makes that investor the owner of the percentage of the company that these shares account for. The total value of the company's shares is known as “market capitalization.”
Consequently, shares are units of ownership from which a range of rights arise, such as the right to receive timely information on the company's operations and financial performance, to attend company meetings, to exercise voting rights and to collect dividends. These rights are regulated under the general principles of the stock markets, but also according to specific provisions, such as the rules for attending shareholders' meetings or the shareholder remuneration policy pursued by each company.
As economist Leopoldo Abadía explains in his informative essay 'Economics for dummies,' the general principle is simple: a person sets up a company and divides its initial capital into a series of parts, each one "represented by a series of small pieces of paper which we call shares." After some time, when the business is fully established, the owner may decide to sell a certain number of these shares on a regulated market, i.e. "a stock exchange."
From then on, the value (quoted price) of the shares will no longer depend on the percentage of the initial capital they represent, but on the "reputation" of the selling company and "the law of supply and demand."
Types of shares: listed, fractional and split
Listed shares
In the example given by Abadía, we would be talking about listed shares, i.e., those that can be freely traded on the stock market. In technical terms, shares are issued in the primary market (when the company puts them into circulation with the aim of raising funds from the public) and then traded on the secondary market, the stock exchange. There are also unlisted shares, i.e., shares issued by companies that have never been listed on the stock exchange or that for some reason have ceased to do so.
The latter type of shares can also be bought and sold, but without the assurance that their being included in the overall system of stock market transactions would imply.
Derivatives.
To add complexity to an otherwise simple formula, there are a number of products in the market that are derived from shares, or have shares as the underlying asset, such as futures and call or put options.
In the case of a futures transaction, the investor undertakes to buy or sell the underlying securities at a future date at an agreed price, whereas in the case of options, the investor has the right to exercise the purchase or sale transaction at a time to be decided within the option expiration period and for the agreed price (strike price), in exchange for a premium.
