Stock

What Is a Stock?


A stock is a security that represents the ownership of a fractional share of a corporation. This entitles the owner of the stock to a proportion of the corporation’s assets and profits equal to how much stock they own. Units of stock are called “shares.”

In most cases, shares are represented by certificates that are issued by the corporation and have an assigned value based on the number of shares outstanding. Stock is usually traded on public stock exchanges, such as the New York Stock Exchange (NYSE) or NASDAQ. Stock prices are measured in units of shares or dollars per share.

Stocks are bought and sold predominantly on stock exchanges, though there can be private sales as well, and are the foundation of many individual investors’ portfolios. These transactions have to conform to government regulations which are meant to protect investors from fraudulent practices. There are regulations for the sale of stock by a corporation, and regulations governing the conduct of brokers who buy and sell stock for others

Understanding Stocks

Corporations are institutions that issue (sell) stock to raise money to operate their businesses. A shareholder, who owns a piece of a company, has now bought stock in the corporation. Depending on the type of stock, he or she may now have a claim to a share of the assets and earnings. In other words, if you were to buy a share of an issuing company, that shareholder is now also your owner. Ownership is determined by the number of shares a person owns relative to the number of outstanding shares. Consider, for example, a company has 1,000 shares outstanding and one person owns 100 shares. If one person owns 100 shares, that person would own and have a claim to 10% of the company’s assets and earnings.

Shareholders don’t own corporations; they own shares issued by corporations. Corporations are a special type of organization because they have the legal personality of a person. The word means to make or cause a corporation. Corporations are formed by filing papers with state and federal governments. Corporations can own property, can borrow money, can be sued, and they even file taxes. The idea that a corporation is a “person” means that the corporation owns its own assets. A corporate office is a place where there are many chairs and tables, not a place belonging to the corporation, and not a place for the shareholders.

This is an important distinction because corporations are legally separate from the property of their shareholders. This legal distinction limits the liability of the corporation and the individual shareholders. This only applies to the business itself. If the corporation goes bankrupt, a judge might order the company’s assets sold – but you and your own assets are not at risk. The court has no power to force you to sell your shares; nevertheless, the value of your shares will have dropped dramatically. Likewise, if a company’s major shareholder goes bankrupt, she cannot sell the company’s assets to pay off her creditors.

Stockholders and Equity

What shareholders really own are shares issued by a corporation and the corporation owns the assets that a firm holds. If you own a quarter of the shares of a company, it is incorrect to state that you own one-quarter of that company; it is instead correct to state that you own 100% of one-fourth of the company’s shares. Shareholders are not free to do what they want to with a corporation or its assets. In most instances, shareholders are free to buy, sell or trade their stock.

Shareholders have an ownership interest in the company. They have the right to vote at annual meetings, receive dividends (which are the company’s profits) when and if they are distributed, and they have the right to sell their shares to someone else.

When you own more than 50 percent of the company’s shares, you become the largest shareholder and, therefore, can indirectly control the direction of the company by appointing its board of directors. When one company buys another, you can see that they didn’t just buy up the building, the chairs, or the employees. The acquiring company buys up all the shares. The board of directors is responsible for increasing the value of the corporation by hiring professional managers, or officers, such as the chief executive officer, or CEO.

Most ordinary shareholders don’t mind not having the power to manage the company. The importance of being a shareholder is that you are entitled to a portion of the company’s profits. These profits build up the value of a stock. If you want to make more money, then the more shares you own, the more profit you’ll get. However, most stocks don’t pay out dividends. Instead, they reinvest the money back into growing their companies. A company that has retained earnings, however, is still reflected in the value of the stock.

Common vs. Preferred Stock

The two main types of stock are common and preferred. Common stock usually gives the owner the right to vote at shareholders’ meetings and to receive any dividends paid out by the corporation. Preferred stockholders generally don’t have voting rights, though they usually have a higher claim on assets and earnings than common stockholders. 

What Is the Difference Between a Stock and a Bond?

When a company raises capital by issuing stock, it entitles the holder to a share of ownership in the company. By contrast, when a company raises funds for the business by selling bonds, these bonds represent loans from the bondholder to the company. Bonds have terms that require the company or entity to pay back the principal along with interest rates in exchange for this loan. In addition, bondholders are granted priority over stockholders in the event of a bankruptcy, while stockholders typically fall last in line in the claim to assets.

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