Stock Exchanges, Shares and Crypto: Risk and Return

Imagine a mountain railway company in the Alps: chairlifts, a restaurant and snow cannons – together worth millions. No one person could pay for all that. This is why the business is a public limited company (AG): its capital is divided into many small stakes – shares. Anyone who buys one owns a small part of the company.

Three things come with this stake:

1. Voting rights: Shareholders may attend the general meeting and take part in decisions – for example, about the management of the company. Put simply, the more shares you own, the more votes you have.
2. Dividend: If the company makes a profit, it may distribute part of it to its shareholders. This share of the profit is called a dividend. It is not guaranteed – in bad years it may be smaller or not paid at all.
3. Capital gain or loss: Shares can be resold. If the selling price is higher than the purchase price, this produces a capital gain – if it is lower, a capital loss.

One important point for everything that follows: a share always represents something real – chairlifts, ovens, factories, employees and customers. The value of the share depends on how successfully this real company operates – now and in the future.

Where are shares bought and sold? On the stock exchange – a marketplace that is now almost entirely digital. This marketplace follows exactly the rules you know from “Angebot und Nachfrage” and “Preisbildung und Marktgleichgewicht”: supply and demand determine the price. The price of a share is called its share price.

• If more people want to buy a share than there are shares for sale, the price rises – just like the price of a scarce concert ticket.
• If more people want to sell than buy, the price falls.

What affects supply and demand? Above all, expectations about the future: if the mountain railway company reports a snowy winter with record sales, many people expect higher profits – more people want to buy and the price rises. If there is no snow for three winters in a row, many expect losses – more people want to sell and the price falls. Because new information is constantly arriving, prices change all the time – from one second to the next.

This also shows that no one sets the price – not the company, the bank or the government. It results from thousands of buying and selling decisions, just like the equilibrium price at the weekly market in “Preisbildung und Marktgleichgewicht”.

A good introduction is explainity's video «Aktien einfach erklärt» (4:22). Using a lemonade factory as an example, it shows how a business becomes a public limited company, issues shares when it goes public and what buyers receive in return. The video is not embedded here – you can find the link below under this module's sources and materials.

As you watch, consider two key questions: (1) Why does the company in the video issue shares in the first place – how does going public benefit it? (2) What do the people who buy the shares receive in return? Compare this with the three points in this module: voting rights, dividends and capital gains.

Two terms so that everyone means the same thing:

• Return is the gain from an investment, usually calculated as a percentage per year. For a savings account, it is the interest; for a share, it is the dividend plus the capital gain (or minus the capital loss).
• Risk means here: how much can the value fluctuate – and how much could be lost in a bad outcome?

The two are linked by one of the most important principles of financial literacy: a higher potential return comes with higher risk. Why? No one voluntarily takes a big risk without the prospect of a greater reward – otherwise everyone would choose the safe option.

On the risk–return graph (see illustration), the three forms of investment in this module are positioned as follows:

• Savings account: low risk, low return. The interest is modest, but the balance does not fluctuate. Only inflation can erode its purchasing power.
• Shares: medium to high risk, higher potential return. Prices fluctuate daily; individual companies can also fail.
• Cryptocurrencies: very high risk, very large fluctuations – more on this shortly.

You should also remember the reverse of this principle: if someone promises a high return with no risk at all, that contradicts this basic rule – such a promise is a warning sign, not an opportunity.

You know cryptocurrencies such as Bitcoin as the final stop on the timeline of money in “Money: Functions and History”: entirely digital money that works without a government, central bank or banks. It is managed by a computer network that many people trust collectively.

The most important difference from a share is that there is no real company behind a Bitcoin. There are no chairlifts, no factory, no employees and no profit – and therefore no dividend or general meeting. Its price is determined solely by supply and demand: it is exactly as high as others are currently willing to pay. If sentiment changes, the price changes – often extremely: fluctuations of several tens of per cent within weeks have occurred, both upwards and downwards. A total loss is possible.

	Share	Bitcoin
What do you own?	A stake in a real company	A digital record – not a stake in anything real
Regular income?	A dividend is possible (not guaranteed)	None
Voting rights?	Yes, at the general meeting	No
What does the price depend on?	Business performance and expectations – traded through supply and demand	Solely on supply and demand
Fluctuations	Sometimes large – a total loss is possible if the company goes bankrupt	Often extreme – a total loss is possible

Whether someone buys shares or cryptocurrencies is a personal decision – this module does not recommend either buying or avoiding them. It gives you the knowledge to assess offers.

One warning is important, however: on social media, strangers repeatedly advertise crypto schemes with promises such as ‘a guaranteed 20% profit per week’ – often using fake celebrity endorsements, time pressure (‘today only!’) and requests to pay money into unfamiliar platforms. Such offers are scams: there is no such thing as a guaranteed high return without risk – in these cases, the money paid in is usually lost.