What Is a Stock & What Does It Represent?

The investment vehicle referred to as stock mainly includes Common Stock, Preferred Stock and Convertible Preferred Stock. Common Stock is what most people think of as stock because it is the most abundant and visible of all investment vehicles.

Common Stock

Common Stock is issued by corporations that are raising capital, and it is considered equity. When a young company needs a large amount of capital to grow its business it may issue Common Stock to the public in an Initial Public Offering (IPO). The people who buy this stock become shareholders, which means that they own a share of the company. Stockholders normally have a vote in certain important decisions such as the approval of Directors or the issuance of additional stock. Some issues of Common Stock do not have voting rights and are issued as a separate series.

The Board of Directors of each company decides how many shares of Common Stock to authorize and--of that amount--how many shares to issue. After an IPO, the total number of shares issued and outstanding may be 100 million shares. If an investor buys 1 million shares, she owns 1 percent of the company. Sometimes a company will need additional capital so it will issue more Common Stock via a secondary offering. Each year, the Board of Directors decides whether to pay out a portion of the company profits to the shareholders in the form of dividends.

Preferred Stock

Like Common Stock, Preferred Stock represents a share of ownership in a company. As the name suggests, Preferred Stock represents a higher level of ownership because if the company fails and goes to liquidation, the Preferred Stock holders will be paid after the bondholders and other creditors are paid. Preferred Stock also normally carries a stated dividend amount, which must be paid before dividends may be paid to Common Stock holders. Many issues are Cumulative Preferred Stock, which indicates that any unpaid dividends will accumulate and the total amount must be paid to the holders before any Common Stock dividends may be paid.

Convertible Preferred Stock

Convertible securities allow the investors to make a decision at some prearranged date whether to convert their holdings to Common Stock. This structure is one strategy that is used to present a more attractive reason to invest capital in a company if that company is not well established or the state of the economy and the performance of the securities markets is uncertain. Convertible Preferred Stock is generally issued by young companies that are planning to go through an IPO, but need capital before their revenue performance or market conditions permit a successful issue. The investor receives an attractive dividend payment until the date when he must decide whether to convert his holdings to Common Stock at the prearranged price.

Private or Public

Any corporation, whether private or public, has Common Stock. That is because it represents ownership, and the founders of the company, certain employees and investors are issued shares of Common Stock to certify their ownership participation. When a young company issues Common Stock to private investors, it does this through a Private Placement, which is governed by strict rules that have been established by the SEC. After the company goes through an IPO, private Common Stock becomes publicly traded Common Stock.

Stock Certificates

Ownership is evidenced by the issuance of stock certificates, which display the name of the issuing company, the name of the stockholder, the unique certificate number, the number of shares represented by the certificate, the date the certificate was issued, the CUSIP number and any descriptions or restrictions applicable to that issue of stock or that particular certificate. Although the securities of private companies are not tradable on the public exchanges, they normally can be sold in private transactions between individuals. If such a sale takes place, the issuing company or its stock transfer agent will destroy the old certificate and issue a new certificate in the name of the new owner.

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