How the Stock Market Works
Shares, indices, dividends & everything in between
What Is a Share?
A share (also called a stock or equity) is a tiny piece of ownership in a company. If Tesco has 1 billion shares and you own 100 of them, you own 0.00001% of Tesco. You’re literally a part-owner of the business.
Real-World Example
Think of a company like a pizza. The pizza is cut into millions of slices. When you buy a share, you buy a slice. If the pizzeria becomes wildly popular, each slice becomes worth more. If they also share some of their profits with slice-holders, that’s a dividend.
How Prices Move
Share prices are driven by supply and demand. If more people want to buy a share than sell it, the price goes up. If more want to sell, it goes down. What makes people want to buy or sell? Company performance, economic news, interest rates, even social media hype.
UK Stock Market Indices
| Index | What It Tracks | Companies |
|---|---|---|
| FTSE 100 | 100 largest UK-listed companies | Shell, AstraZeneca, HSBC |
| FTSE 250 | Next 250 companies by size | Greggs, easyJet, JD Sports |
| FTSE All-Share | Virtually all UK-listed companies | ~600 companies |
| S&P 500 | 500 largest US companies | Apple, Microsoft, Amazon |
Key Concept
An index is just a basket of shares used to measure how the overall market (or a section of it) is performing. When the news says “the FTSE is up”, they mean the average price of those 100 big companies went up.
Dividends vs Growth
Dividend stockspay you a regular income — typically every 3 months. Think of big, mature companies like Unilever or National Grid. They don’t grow fast, but they share their profits.
Growth stocksreinvest their profits back into the business. They don’t pay dividends, but their share price (hopefully) rises faster. Think tech companies.
Market Cap
Market capitalisation = share price × number of shares. It tells you how much the market thinks the entire company is worth.
- Large-cap: £10bn+ (stable, established)
- Mid-cap: £2bn–£10bn
- Small-cap: Under £2bn (higher risk, higher potential)
P/E Ratio: Is a Share Expensive?
The Price-to-Earnings ratio tells you how much investors are paying for each £1 of profit. A P/E of 15 means investors pay £15 for every £1 the company earns annually.
A high P/E (30+) means investors expect big growth. A low P/E (10) might mean the company is undervalued — or that investors expect trouble ahead. It’s a starting point, not a verdict.
Bull vs Bear Markets
A bull market is when prices are generally rising and optimism is high. A bear marketis when prices fall 20%+ from recent highs and pessimism takes over. Markets cycle between the two — they always have and always will.
Warning
Buying individual stocks is risky. Even experts get it wrong. For most people, a diversified index fund is a far better choice than trying to pick winners. You wouldn’t bet your savings on a single horse — don’t bet it on a single company.