What can I trade

Shares can be described in a variety of interchangeable ways. When someone talks of stocks, equities, securities or holdings, they are using other terms for shares. Shares entitle you to a 'share' of a company's assets and earnings as well as the right to vote on certain company matters. When a company is first set up, someone will put up the money to buy the capital assets (the machinery, computers, desks and whatever is needed). Investors will all receive a share in the company related to how much money they put in.

If the firm is very successful and the company grows, it may need more money to develop the business. There are two ways to achieve this. It can borrow money from the bank, or it can sell off more shares. Raising money by selling off part of the company has many attractions for the company. The buyers are relying on future performance of the company, and do not have to be paid fixed sums at fixed dates. The principal on the loan is not repayable, so once the company has received the capital, all they have to do is grow the business every year.

Bankers and regulators judge that some firms are good enough to be allowed to raise money from the 'public', i.e. you and me. To do this, they issue a prospectus which sets out what the regulator thinks you need to know to make an informed decision about investing in this company. When a company offers its shares to the public for the first time, it is called an Initial Public Offering (IPO). This process is known as 'flotation' and 'going public'.

In purely financial terms IPOs are done for two reasons; the directors may want to raise additional capital or they may want to allow some early investors to realise the value of their initial investments. The two are not necessarily exclusive. When shares are offered to the public, they will normally be traded on a stock market. Only the shares offered to the public are traded on the stock market and sometimes large holdings in public companies are not traded. The amount of shares available to buy on the stock market is called the free float, or sometimes just float. When already on the stock exchange or listed, a company can raise more money (or sell off existing shares) by doing follow on deals.