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 entitle 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.
Understanding Stocks
Corporations issue stock to raise funds to operate their businesses. 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.
Stockholders do not own a corporation, but corporations are a special type of organization because the law treats them as legal persons. Corporations file taxes, can borrow, can own property, and can be sued. The idea that a corporation is a “person” means that the corporation owns its assets. A corporate office full of chairs and tables belongs to the corporation, and not to the shareholders.
Corporate property is legally separated from the property of shareholders, which limits the liability of both the corporation and the shareholder. If the corporation goes bankrupt, a judge may order all of its assets sold, but a shareholder’s assets are not at risk. The court cannot force you to sell your shares, although the value of your shares may have fallen. Likewise, if a major shareholder goes bankrupt, they cannot sell the company’s assets to pay their creditors.
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 “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.4 This becomes most apparent when one company buys another. The acquiring company buys all the outstanding shares.
The board of directors is responsible for increasing the value of the corporation and often does so by hiring professional managers, or officers, such as the chief executive officer (CEO). Ordinary shareholders do not manage the company.
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. Also, 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
FAQs
How Do You Buy Stock?
Most often, stocks are bought and sold on stock exchanges, . 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.
Is It Risky to Own Stock?
All investments have a degree of risk. Stocks, bonds, mutual funds, and exchange-traded funds (ETFs) 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
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