What Are Stock Shares?
One of the ways a corporation raises capital is by selling stock. A share of stock, also known as equity share, is a share of ownership in the corporation. The owner of a share of stock will not have direct control over a corporation, but he is entitled to a proportionate distribution of any profit that is declared in the form of a dividend.
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The Facts
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When a company goes public, it is called an IPO, or initial public offering. Shares of stock in that company are first sold on the primary market. Once the stock is bought, it can then be traded back and forth on the secondary market, typically referred to as the stock market.
The more shares the company sells, the more money it makes. However, the more shares that are available to the public, the less power each share holds.
Types
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There are two types of stock--common and preferred. A share of common stock carries a voting right. Thus, for every share of common stock someone owns, she also owns a vote in company decisions, such as whether to accept a buyout agreement. However, common stockholders are the last to receive payment in liquidation.
Preferred stock does not come with a voting right, but it does come with a constant dividend that must be paid out to the shareholder. Therefore, the company must pay its preferred stock dividend obligations before it can pay dividends to common stock shareholders.
Significance
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A person invests in a company by buying its stock with the hope that the value of that stock will increase. Shareholders make money on their investment by receiving dividends and by selling the stock at a higher price than they paid for it. The more shares a person owns, the larger his ownership stake in that company and the greater the risk and reward.
For example, if a stock costs $1 a share and you buy 10 shares, your portfolio is worth $10. If the price of the stock goes up to $2, your portfolio is worth $20. However, if you bought 100 shares instead of 10, your portfolio would be worth $200. Thus, the more shares you own, the more significant a change in stock price is, for better or worse.
Function
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Most stocks are traded on organized market places known as exchanges. The two biggest exchanges in the United States are the New York Stock Exchange (NYSE) and the NASDAQ. To be listed on either exchange, the company must pass certain requirements and pay fees.
The NYSE has a physical location on Wall Street in New York. The NASDAQ has no physical location; all trades are made electronically.
These exchanges help provide liquidity to the stock market by organizing a way for trades to be made easily and at fair market value.
Considerations
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Investing in stocks is not just for Wall Street. Stocks can be traded by anyone with money and the will to do so. To begin trading stock, you must sign up for a brokerage account and then decide which company you want to buy and how much money you are willing to invest. Once you place an order, the brokerage firm will have one of their brokers buy the stock.
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