A stock – is a piece of a business property. Owning a share you become a stockholder which means you have rights on getting dividends in case your company scores a success and you also have some voting rights.
What is a Stock?
Stocks are a crucial part of the world economy. They allow companies to find money for the business by selling shares (or pieces of ownership) to the public . They can be sold in such stock markets as NASDAQ and many others. Sometimes stocks can be bought in a private way. The Securities Exchange Commission (SEC) establishes some specific rules which control the abilities of companies to operate with shares. There are two types of shares – common stocks, which allow investors to vote in business processes, and preferred stocks, which, on the one hand, aren’t able to give shareholders any vote rights, but on the other provide them an unlimited constant payment for dividends.
As you can see, shares seem to be a piece of property in the donuts company.
Let’s pretend that you want to create your own donuts business. However, there is a problem – the 1000 dollars you have are not enough to start the business. Then you ask your family members or friends to increase your seed capital and buy on this money all the things you need for the baking. If three relatives give you 1000 dollars per head, the final sum will consist of 4000 dollars so you can easily get started with the business. You can propose 25% of ownership in your company in exchange for their investment. This is a simple example of the shares working process.
A page from the history
The first people who started using a tool similar to stocks were the Romans. The state was hiring business owners to sell something kind of stocks and debt capital for their projects. This process is now known like “lease holding”.
In the 1600’s the first stock selling business was considered the British East India (EIC) company. It was called like this because of selling commodities all over the Indian ocean region. This company is believed as the parent of modern joint-stock companies.
The difference between stocks and other financial instruments
There is a big difference between stocks and bonds. First of all, bonds are based on the debt issues which means governments or companies borrow money from investors and in exchange for this provide them % from the bond value. Bond holders aren’t able to take part in business decisions, however their investment is more guaranteed than the shareholders’ one. Another thing which differs stocks from bonds is the way of how they are traded. Shares are usually traded on stock markets while bonds are sold over the counter (investor has to contact only with the issuing company).
What differs futures and options from stocks? The greatest difference is that first ones, unlike shares, are considered as derivatives, so their value is connected to another assed as commodities or currencies. Their conception is based not on ownership but on contracts.
Stock market operating principle
The definition of the “stock market” is a general term that includes a large number of markets where stocks are sold, bought and issued on an ongoing basis.
The “stock market” consists of many other separated stock exchanges. The Better Alternative Trading System (BATS), the New York Stock Exchange (NYSE), the Chicago Board Options Exchange (CBOE) and Nasdaq are the most popular stock exchanges in the USA. These stock exchanges in aggregate constitute the whole stock market of the U.S.
In spite of being called “stock exchanges”, they also provide the ability to trade bonds, derivatives and commodities.
Common Stocks. Company stocks are most likely to belong to this category, so if you own a company stock it is probably a common stock. The greatest priority of this type is the fact that they bring owners voting rights. In many cases every share is rated as one vote. Common stockholders are able to bear a part in annual meetings and vote for business issues (like choosing company strategy).
Preferred Stocks. This type of shares is usually bought by some who are interested not in corporate issues but in stable dividend payments. These stocks can also be redeemed by the emitter.
Some more actual terms
Free/public float – shares which are published on the market and traded on the stock exchanges. The higher rate of this index shows the bigger amount of money a company tries to receive from investors.
Stock splits – the process of making the stock value more available for investors. There won’t be any changes in the market capitalisation whereas the number of accessible shares will increase.
Short-selling – means selling shares without being an actual shareholder. It is used when an investor is trying to speculate on the decrease of prices. It also needs borrowing stocks from others.
Stockholders equity – is based on the assets which stay in the company after paying all the issues. This index better explains the value of shares.
Blue-chip stocks – some companies which are large, liquid and well-capitalized, are usually traded on such stock exchanges as NYSE or Nasdaq.
Broker – a person or a company makes deals in the place of an investor and in exchange for this receives a commission.
Buying on margin – is a deal when an investor borrows money to buy some shares.