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How the stock market works What is a share? Someone who owns a share (a shareholder) owns a part of the company and is entitled to a part of the profits. What are the benefits of owning shares? Firstly, the shareholder receives a share of the company’s profits – known as dividends. Secondly, the shares can go up in value and create a profit for the shareholder. However, it is also possible the shares will go down in value and the shareholder will lose money, therefore, owning shares involves a risk . How many shares are companies split into? This varies between companies – some companies have a large number of shares at a low price, others will have a smaller number of shares at a higher price. Is a company with a high share price better than company is better than a company with a low share price? No. As explained before it could just mean that the high priced company has more shares. The important point is whether the share price is going up or down.

Shares and risk It is possible to make a lot of money buying and selling shares; it is also possible to lose a lot of money. For example, Northern Rock If you had Northern Rock shares in February they would have been worth about £10 each. If you still had those shares yesterday they would be worth just £1.35. Someone with 1 000 shares would have lost around £8650!

Why do share prices change? Like all prices they are determined by demand and supply i.e. the number of people who wish to buy the shares (demand) and the number of people who want to sell the share (supply) If more people want to buy shares in a company their price will go up. If less people want to buy shares in the company or more people want to sell them then the price will go down.

Why would demand for a share rise? The companies profits are increasing? There is a takeover bid for the company. The company is expanding – new outlets, etc The company launches a successful product. The company discovers a new technology. People expect the price to rise – if people believe that any of the factors above are going to happen in the future then they will buy the shares.

Why would demand for a share fall? The companies profits are falling. A takeover bid for the company has been unsuccessful. The company is reducing in size – closing outlets, etc The company launches an unsuccessful product A competing company launches a successful product Government legislation changes that negatively affects the company (e.g. ban on smoking in public in UK) People expect the price to fall – if people believe that any of the factors above are going to happen in the future then they will sell the shares.