Understanding stocks

A stock, also known as equity, is a security that represents the ownership of a fraction of the issuing corporation. Units of stock are called "shares" which entitles the owner to a proportion of the corporation's assets and profits equal to how much stock they own. 

Stocks are bought and sold predominantly on stock exchanges and are the foundation of many individual investors' portfolios. Stock trades have to conform to government regulations meant to protect investors from fraudulent practices.

Corporations issue stock to raise funds to operate their businesses and the holder of stock, a shareholder, may have a claim to part of the company's assets and earnings.

A shareholder is considered an owner of the issuing company, determined by the number of shares an investor owns relative to the number of outstanding shares. If a company has 1,000 shares of stock outstanding and one person owns 100 shares, that person would own and have a claim to 10% of the company's assets and earnings.

Types of stocks

There are two main types of stocks: common stock and preferred stock. A common stock gives shareholders voting rights but no guarantee of dividend payments. And a preferred stock provides no voting rights but usually guarantees a dividend payment. Owners of preferred stock receive dividends before common shareholders and have priority if a company goes bankrupt and is liquidated.

Broadly speaking, investors can profit from stock buying by purchasing shares when they are at a low price and selling them when the price goes up. Most often, stocks are bought and sold on stock exchanges, such as the Nasdaq and the New York Stock Exchange. The stock price can and will rise and fall, based on a variety of factors in the global landscape and within the company itself. You can profit from buying stocks by selling your stock if the stock price increases from their purchase price.

Owners of preferred stock receive dividends before common shareholders and have priority if a company goes bankrupt and is liquidated.

What Is Shareholder Ownership? 

What shareholders own are shares issued by the corporation, and the corporation owns the assets held by a firm. If you own 33% of the shares of a company, it is incorrect to assert that you own one-third of that company. However, you do own one-third of the company’s shares. This is known as the “separation of ownership and control.”

Owning stock gives you the right to vote in shareholder meetings, receive dividends if and when they are distributed, and the right to sell your shares to somebody else.

If you own a majority of shares, your voting power increases so that you can indirectly control the direction of a company by appointing its board of directors. This becomes most apparent when one company buys another; the acquiring company buys all the outstanding shares.

Owning stock gives you the right to vote in shareholder meetings, receive dividends if and when they are distributed, and the right to sell your shares to somebody else.

The importance of being a shareholder is that you are entitled to a portion of the company's profits, which is the foundation of a stock’s value. The more shares you own, the larger the portion of the profits you get. Many stocks, however, do not pay out dividends and instead reinvest profits back into growing the company. These retained earnings, however, are still reflected in the value of a stock.

What is the difference between stocks and bonds?

Stocks are issued by companies to raise capital to grow the business or undertake new projects. There are important distinctions between whether somebody buys shares directly from the company when it issues them in the primary market, or from another shareholder in the secondary market. When the corporation issues shares, it does so in return for money.

Bonds vary from stocks in several ways. Bondholders are creditors to the corporation and are entitled to interest as well as repayment of the principal invested. Creditors are given legal priority over other stakeholders in the event of a bankruptcy and will be made whole first if a company is forced to sell assets. Conversely, shareholders often receive nothing in the event of bankruptcy, implying that stocks are inherently riskier investments than bonds.

How do you buy stock?

Most often, stocks are bought and sold on stock exchanges, such as the Nasdaq or the New York Stock Exchange (NYSE). After a company goes public through an initial public offering (IPO), its stock becomes available for investors to buy and sell on an exchange. Typically, investors will use a brokerage account to purchase stock on the exchange, which will list 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, among other variables.

Key Takeaways

• A stock is a form of security that indicates the holder has proportionate ownership in the issuing corporation and is sold predominantly on stock exchanges.

• Corporations issue stock to raise funds to operate their businesses.

• There are two main types of stock: common and preferred.

• You may profit from buying stocks in two ways: investing for capital appreciation and getting dividend payments.

• Historically, stocks have outperformed most other investments over the long run.

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