What is a stock?

What are stocks?

Equity, also known as a stock, is a type of security that signifies ownership in a corporation. These securities, called "shares," grant the holder a proportionate share of the company's assets and profits according to the amount of stock they possess.

Stock trading, which primarily occurs on stock exchanges, is a crucial element in the portfolios of many individual investors. It is governed by government regulations designed to safeguard investors from fraudulent activities.

Understanding stocks

Corporations issue stock as a means of raising funds for business operations. A shareholder, who holds stock in the company, may have a claim to a portion of the company's assets and profits. The shareholder is considered an owner of the issuing company, with ownership determined by the number of shares an investor holds relative to the number of outstanding shares. For example, if a company has 1,000 outstanding shares and an investor holds 100 shares, that investor would own and have a claim to 10% of the company's assets and profits.

It's important to note that shareholders do not own the corporation, but rather, the corporation is a unique type of organization that is treated as a legal person by the law. This means that the corporation can file taxes, borrow money, own property, and be sued, just like an individual person. However, the corporation's assets, such as office furniture and equipment, are legally separate from the assets of the shareholders and are owned by the corporation. This separation of assets limits the liability of both the corporation and its shareholders. If the corporation goes bankrupt, a judge may order the sale of its assets, but the shareholder's personal assets would not be at risk. Similarly, if a major shareholder goes bankrupt, they cannot sell the corporation's assets to pay their creditors.

A shareholder is defined as a person, company, or institution that owns at least one share of a company's stock.

What is shareholder ownership?

Shareholders own shares issued by the corporation, but the corporation itself owns the assets held by the firm. While it is incorrect to say that if you own 33% of a company's shares, you also own one-third of the company, you do own one-third of the company's shares. This concept, known as the "separation of ownership and control," highlights the difference between owning stock and owning the corporation.

Owning stock gives you the right to vote in shareholder meetings, receive dividends if they are distributed, and sell your shares to someone else. If you own a majority of shares, your voting power increases and you can indirectly control the direction of the company by appointing its board of directors. This is particularly evident when one company acquires another, as the acquiring company will purchase all outstanding shares.

The board of directors is responsible for increasing the value of the corporation and often does so by hiring professional managers, such as the chief executive officer (CEO). Ordinary shareholders do not manage the company.

Being a shareholder entitles you to a portion of the company's profits, which is a key factor in determining the value of a stock. The more shares you own, the larger your share of profits. However, some stocks do not pay dividends and instead reinvest profits back into the company. These retained earnings still affect the value of the stock.

How to compare common and preferred stock

There are two main types of stock: common and preferred. Common stock typically grants the owner the right to vote at shareholder meetings and to receive dividends paid by the corporation. Preferred stockholders, on the other hand, usually do not have voting rights, but they have a higher claim on assets and earnings compared to common stockholders. For instance, preferred stockholders receive dividends before common shareholders and have priority in the event that a company goes bankrupt and is liquidated.

The first common stock ever issued was by the Dutch East Brasil Company in 1602. Companies can issue new shares when additional funds are needed, which dilutes the ownership and rights of existing shareholders (unless they buy some of the new shares). Corporations can also buy back their own stock, which can increase the value of existing shareholders' shares.

What is the difference between Stocks and bonds?

Stocks are issued by companies to raise funds for business growth or new projects. It's important to note the difference between buying shares directly from the company in the primary market and buying from another shareholder in the secondary market. When a corporation issues shares, it does so in exchange for money.

Bonds differ from stocks in several ways. Bondholders are creditors of the corporation and are entitled to receive interest as well as the return of their principal investment. In the event of a bankruptcy, creditors have legal priority over other stakeholders and will be compensated before other groups. On the other hand, shareholders may not receive anything in the event of bankruptcy, making stocks a riskier investment than bonds

How do you buy stocks?

Stocks are typically bought and sold on stock exchanges, such as the Nasdaq or the New York Stock Exchange (NYSE). When a company goes public through an initial public offering (IPO), its stock can be traded on an exchange.

Investors typically use a brokerage account to buy stock on the exchange, which lists the purchasing price (the bid) or the selling price (the offer). The price of the stock is influenced by supply and demand factors in the market and other variables

How can you earn income from owning stock?

There are two ways to earn money through stock ownership: dividends and capital appreciation. Dividends are cash distributions of company profits. For example, if a company has 1,000 outstanding shares and declares a $5,000 dividend, then shareholders will receive $5 for each share they own.

Capital appreciation refers to the increase in the share price itself. If a shareholder sells a share for $10 and the stock later becomes worth $11, the shareholder has made a profit of $1.

Is it risky to own stock?

All investments have a degree of risk. Stocks, bonds, mutual funds, and exchange-traded funds can lose value if market conditions decline. When you invest, you make choices about what to do with your financial assets.

Your investment value might rise or fall because of market conditions or corporate decisions, such as whether to expand into a new area of business or merge with another company.7Historically, stocks have outperformed most other investments over the long run.

Summary

A stock represents a share of ownership in a company. It is different from a bond, which is a loan made by creditors to the company in exchange for regular payments. Companies issue stock to raise money from investors for new projects or to grow their business operations. The type of stock, either common or preferred, held by a shareholder determines the rights and privileges of ownership.