How shares work

A sketchnote explaining how shares work using a simple example. Full text description below.

This sketchnote explains how shares work through a simple example. Shares are used to show ownership of a company. So if you own shares in Apple Inc, it means you own a small part of that company.

Here’s how they work…

Five friends decide to start a company (obviously having previously sketched out the business plan on a beermat!).

They each put in £200 to get the company going. 

The company is incorporated and because each person puts in an equal amount, they all own a 20% share of the business.

The five friends (now business partners) are free to sell all or some of their shares to another person. They could also buy shares from one or more of the other partners and increase their level of control over the business.

If the business makes a profit, then the partners can choose to take a dividend, where the profit is split amongst them. A £500 profit, would provide each partner with a £100 dividend.

Or they can choose to reinvest the profit into the business, which increases the value of their shares from £200 to £300. Selling their shares now will give them a £100 return on their initial investment.

On the other hand, if the business makes a loss, then the value of the shares decreases. A £500 loss would reduce each person’s shares from £200 to £100. Selling their shares now will result in a £100 loss on their initial investment.

So in a nutshell…

  • Shares represent ownership of part of a business.
  • Shareholders can receive an income from their shares in the form of dividends.
  • Or if profits are reinvested, the value of their shares will grow and could be sold for a profit.
  • Or if the business makes a loss, the value of the shares will drop. Selling them now means a loss on the initial investment.

Thanks for reading 🙂