On 2 January 2026, the FTSE 100, the index that tracks the hundred largest companies on the London Stock Exchange, went above 10,000 points for the first time¹. A few days later it closed above that level, at 10,004.57, after a year in which it had risen by more than 21%, its best year since 2009². When the index began on 3 January 1984, it was set at 1,000³.

Headlines like these make the stock market sound like a scoreboard. Numbers go up, numbers go down, and people on television explain why. But behind every number is something quite ordinary: millions of people buying and selling small pieces of real businesses. If you understand what one of those pieces is, most of the rest of this book will make sense.

This chapter explains what a share is, why companies sell them, the two ways shareholders can make or lose money, what an index like the FTSE 100 measures, and why the long-run record of shares is both encouraging and a warning.

A share is a slice of a business

A company is a business that exists in law separately from the people who own it. Its owners are its shareholders. If a company has issued 1,000 shares and you own 10 of them, you own 1% of the company. That gives you three things: a share of any profits the company decides to pay out, a vote on certain big decisions, and a claim on whatever is left if the company is ever wound up, after everyone it owes money to has been paid.

The bakery example shows the basic deal. The company gets money it does not have to pay back. The investor gets part-ownership, with no promise of any return at all. If the new shops do well, the slice becomes more valuable. If they fail, the investors can lose everything they put in, but no more: as owners of a limited company, their loss is limited to what they paid for their shares.

Owning is not the same as lending

It helps to compare a share with the two other places people usually put money: a savings account and a bond.

That last row is the heart of it. Shareholders take the most risk, because everyone else is paid first. In return, they get whatever is left over when the business does well, which over long periods has usually been more than lenders receive. We will look at the evidence later in this chapter and in Chapter 5.

Why companies list on a stock exchange

Most companies never sell shares to the public. Rosebank Bakes found its investors locally. But a large business that wants to raise a lot of money, or whose owners want to be able to sell their shares easily, may choose to list its shares on a stock exchange such as the London Stock Exchange or the Colombo Stock Exchange.

The first time a company sells shares to the public is called an initial public offering, or IPO. In 2025, for example, three companies listed on the Colombo Stock Exchange through IPOs⁵. The money from an IPO goes to the company, or to the existing owners who are selling.

After that, almost all trading is between investors. When you buy a share of a large company through an app or a broker, you are almost never buying it from the company. You are buying it from another investor who wants to sell. The company receives nothing from that trade. This is called the secondary market, and it is what people usually mean by “the stock market”.

Why does the secondary market matter to the company, then? Because it makes the company’s shares easy to buy and sell, which makes investors more willing to buy them in the first place, and it gives the company a public price that shows what investors think it is worth.

Two ways to make, or lose, money

A shareholder can gain in two ways: from dividends and from a rise in the share price. Both can disappoint.

A dividend is a payment a company makes to its shareholders out of its profits, usually once or twice a year. It is not guaranteed. A company can cut or cancel its dividend at any time, especially when profits fall. Some companies, especially fast-growing ones, pay no dividend at all and reinvest all their profits.

The second way is a change in the share price. If you buy a share for £5 and later sell it for £6, you have made a capital gain of £1. If you sell it for £4, you have made a loss of £1.

A worked example

Here is an illustration with round numbers. It is not a prediction of any real share.

You buy 100 shares in a company at £5.00 each, so you pay £500. Over the next year the company pays a dividend of 20p per share, which is £20 to you. At the end of the year the share price is £5.50.

• Dividend received: 100 × £0.20 = £20
• Gain in value: 100 × (£5.50 − £5.00) = £50
• Total return before costs and tax: £20 + £50 = £70, or £70 ÷ £500 = 14%

Now suppose instead that the share price falls to £4.00 by the end of the year, but the dividend is still paid.

• Dividend received: £20
• Fall in value: 100 × (£4.00 − £5.00) = −£100
• Total return: £20 − £100 = −£80, or −16%

The dividend softened the fall but did not stop it. Notice too that the £20 was 4% of what you paid (£20 ÷ £500). That figure is called the dividend yield, and you will see it quoted for almost every share. A high dividend yield can mean a generous company; it can also mean that the share price has fallen because investors expect trouble, which pushes the yield up. Chapter 3 returns to this.

In real life you would also pay dealing costs and, outside a tax-free account such as an ISA, possibly tax on dividends and gains. Chapter 2 covers costs and Chapter 8 covers tax.

What an index measures

An index is a single number that summarises the prices of a group of shares. The FTSE 100 includes the hundred largest companies listed in London, weighted by their size, so a big company moves the index more than a small one. In Sri Lanka, the All Share Price Index, or ASPI, covers every company listed on the Colombo Stock Exchange, and the S&P Sri Lanka 20 tracks twenty large ones.

An index is useful as a thermometer: it tells you, roughly, how the market as a whole has done. It is also the basis of index tracker funds, which simply try to copy an index, and which Chapter 7 looks at in detail.

The chart shows a handful of landmark levels. It took a little over three years to go from 1,000 to 2,000, which it first passed on 30 April 1987³. It reached a record of about 6,930 at the end of 1999⁶. It then fell, recovered to about 6,732 in June 2007, and fell again to 3,512 in March 2009 during the financial crisis, nearly half below that peak⁶. And in January 2026 it passed 10,000.

Two warnings hidden in that chart

First, the long climb hides long periods of going nowhere. The FTSE 100 first reached 6,000 in March 1998 and did not reach 7,000 until 2015: 6,206 days, about seventeen years¹. Someone who invested a lump sum near the top in 1999 and needed the money a few years later would have had a miserable experience.

Second, the FTSE 100 is a price index. It shows only share prices and ignores the dividends companies paid along the way. For British companies, which have tended to pay generous dividends, that leaves out a large part of what owners actually received. An investor who reinvested dividends did considerably better than the index level alone suggests. When you compare investments, always check whether a figure includes dividends; a total return figure does.

What the long run shows

The best-known long record of investment returns is the UBS Global Investment Returns Yearbook, compiled by Elroy Dimson, Paul Marsh and Mike Staunton, which covers 35 markets, most of them from 1900 onwards⁷. Its 2026 edition illustrates the difference between owning and lending with one example: one US dollar invested in American shares at the start of 1900, with dividends reinvested, would have grown to $124,854 by the end of 2025. The same dollar in long-term government bonds would have grown to $284, and in short-term Treasury bills to $69⁷.

Those numbers are before inflation, which ate away most of the value of money over 126 years. After inflation, American shares returned about 6.6% a year, bonds 1.6% and bills 0.5%⁸. The authors also found that shares beat bonds, bills and inflation in every country with a continuous investment history since 1900⁷.

That is the encouraging part. The warning is in the same report: shares and bonds have on several occasions lost more than 70% of their value in real terms⁸. The figures above are also for the United States, which was an unusually successful market over the period; other countries did less well. Long-run averages are real, but nobody gets the average. You get the particular years you happened to be invested, in the particular markets you chose.

Why so many people keep their money in cash

Many people with savings never take this risk at all. The Financial Conduct Authority’s Financial Lives survey found that 61% of UK adults with more than £10,000 of investible assets held at least three-quarters of it in cash⁹. The same survey found that one in ten people had no cash savings at all.

Holding cash is not foolish. Money you will need in the next few years, and an emergency fund, belong somewhere safe and easy to reach, for reasons Chapter 12 explains. The question this book helps you answer is a narrower one: for money you will not need for many years, do you understand the trade-off well enough to make your own decision, rather than leaving it in cash by default or handing it to the first person who promises a high return?