A stock (also known as equity) is a type of security that distinguishes its owner as the owner of a certain part in a business, i.e. a fraction of an entity. The notion of stock is synonymous and similar to equities, representing their type that is, unlike other types, traded and invested mostly through stock exchanges. The other channel for a possible trade is the private sale.
Fractions of stocks are called shares, however, the terms are interchangeable, which is a common source of confusion. They entitle their owner to a portion of the assets belonging to the issuing corporation, as well as the proportionate part of the issuer’s profits. Historically, this type of investment has been the most beneficial, outperforming the others, for example, real estate.
The first thing you need to do to buy stocks or shares is create a brokerage account, although the initial sum you are required to deposit is quite high, usually $10,000. Hence, investing in such equities had not been accessible to everyone until recently. Those who cannot afford to purchase stocks for this amount of money, can use the services of the exchange-traded funds.
How Stocks Work
Selling stocks is one of the major sources of funds for the companies in the need of additional financing sources for operating their businesses. The stockholder (also called a shareholder) has now purchased a part of the company and, contingent on the kind of shares held, might have a legitimate claim to a portion of its earnings and assets. In other words, it means a stockholder is now an official partial owner of the company that issued the stocks.
However, the number of owners may change if the new shares are issued, while the rights of the owners are determined according to the number of shares owned by the investors in relation to the volume of shares outstanding. The determination of ownership depends on the total number of shares an individual owns relative to the total volume of outstanding shares.
Types of Stocks
Selling stocks is one of the major sources of funds for the companies in the need of additional financing sources for operating their businesses. Having purchased a fraction of the company, the stockholder (also commonly called a shareholder) may or may not hold the right to influence key decisions made by the company leaders, contingent on the kind of shares held.
Hence, the stocks are typically subdivided into two classes – common and preferred, with the voting right being their main distinction.
The common stocks give the investor the voting right, wherein their vote will be directly proportionate to the number of shares held. This way they take an active part in the appointment of CEO, auditors, vote for acquisitions, changes in the corporate policy or in the election to the board of directors
The preferred stocks do not give their holders the right to vote, however, they derive their name from the preference over the common shareholders to receive dividends. Another privilege the preferred shareholders enjoy is the right to receive the issuing company’s assets in the event of liquidation.Additionally, the common stock type is further subdivided based on the voting rights it gives its holder. Even though the basic principle of common shares, or sticks, is that they should endow their owners with the equal voting rights, with one vote being equal to one share purchased by the investor, dual and multiple subclasses of common stocks exist in some companies. These imply that the issuing entity decides on the with different voting rights, or the set number of votes, attached to a certain class.
