What you will learn
- Distinguish a share from a basket measure.
- Relate the same ownership percentage to changing market value.
Stock
A company issues stock to raise money without borrowing it, and each share represents a fractional ownership claim. Shareholders can gain from rising share prices and from dividends, and ordinary shares usually carry voting rights on major company decisions.
The price reflects what buyers and sellers collectively expect about the company's earnings, risks and interest rates, so it can move sharply on news. In Hong Kong, stocks trade in board lots whose size differs from stock to stock, so the minimum purchase is set stock by stock.
Equity
On a balance sheet, shareholders' equity is total assets minus total liabilities, built from money raised from shareholders plus profits kept in the business. It is an accounting figure and can differ greatly from the value the stock market places on the company.
Equity sits last in the order of claims: lenders are paid interest and principal first, and shareholders receive what remains. That residual claim is why equity can gain more than debt when a business does well and absorb losses first when it does not. In markets the same word also names the asset class of company shares.
Index
An index provider sets rules for eligibility, size, liquidity and review dates, then calculates a level from the constituents' prices and a weighting scheme. For a cap-weighted price index, the level is the constituents' combined market value divided by a divisor that is adjusted for membership changes and corporate actions, so the level does not jump when those changes occur.
A price index counts only price changes, while a total return index also adds reinvested dividends, so two versions of the same index grow at different rates. Funds and derivatives can be built to track an index, but an index itself cannot be bought.
Worked example: A fixed percentage is not a fixed value
Illustrative: Company A has 1,000,000 shares. A holding of 100 shares represents 0.01% of the company. At HK$20 per share it is worth HK$2,000; at HK$18 it is worth HK$1,800, while the ownership percentage remains 0.01%. An index reading is a separate basket measure, not a claim to this company’s assets.
Check your understanding
If the company still has 1,000,000 shares, what percentage does 250 shares represent? Does the percentage reveal the cash received if sold?
Show answer and explanation
250 ÷ 1,000,000 × 100% = 0.025%. Cash proceeds also depend on the execution price, quantity filled and costs; the ownership percentage alone does not determine them.