Stock

A stock is very simply representative of a small piece of ownership in the company whose stock you are buying.

A “public” company is one that has issued shares by selling them to the general public. Once those shares have been sold, investors can trade the stock among themselves on exchanges like the New York Stock Exchange NYSE or the Nasdaq.

Unlike getting a loan from a bank or issuing debt in the form of bonds, when a company issues stock, they are selling off a part of the company to the public. The advantage of issuing stock, is this allows the company to raise capital without having to pay the money back.

There are two main types of stock: common and preferred. Common stock usually entitles the owner to vote at shareholders’ meetings and to receive dividends. Preferred stock generally does not have voting rights, but has a higher claim on assets and earnings than the common shares. For example, owners of preferred stock receive dividends before common shareholders and have priority in the event that a company goes bankrupt and is liquidated.

From the public’s perspective, we will buy a company’s stock in the hopes that the company will do well, and that we as shareholders will get to participate in the upside growth of the company through increases in the price of the stock that we own, and payouts of the firms profits through something called dividends. But many very profitable companies don’t pay dividends at all. The downside of owning a company’s stock is that the profit that you will earn from the stock is not fixed and guaranteed so long as the company stays in business like it is with bonds, and just as the price of your stock will go up if the company does well it will go down if the company does poorly. Lastly here, is the fact that in the event of a bankruptcy of the company, the stockholders are the last people in line to be paid, behind the bond holders and others that have loans out to the company.