Introduction to Stocks and Shares
Financial advisors abound with recommendations for clients to buy this stock or sell shares of that stock. Many clients do not understand what this means and rely fully on their advisor to tell them what to do. Others take a more proactive approach and want to understand what these terms refer to.
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Characteristics Of Stock
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Stock represents a method of financing for a corporation. Corporations issue stock to investors in exchange for funds to use in the business. The sale of stock represents selling a portion of the company to the investor. In exchange for their money, stockholders receive the right to vote on major company decisions, like approving an acquisition or electing new board members. Stockholders also receive the right to dividends if the company chooses to issue them. If a corporation liquidates, the stockholders do not hold creditor claims to the assets. Instead, once all the creditor claims are satisfied, the remaining value is divided among the stockholders.
Shares Of Stock
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The company issues stock in individual shares. Each share can be bought or sold independently on the stock market. The stockholder and potential stock purchaser determine the price of each share of stock sold on the open market. This price may fluctuate throughout the day. Dividends are paid out on a per share basis.
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Par Value / Stated Value
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The corporation assigns each share of stock a par value or a stated value. The par value or stated value assigns an arbitrary value to each share of stock. The corporation uses this value in the financial records to determine the number of shares outstanding. Par value or stated value holds no relationship to the market price of the stock. If the corporation issues the stock for more than the par value or stated value, the company records the difference in an account called paid in capital.
Types Of Stock
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Corporations issue shares of preferred stock and common stock to investors. Preferred stock entitles the holder to receive dividends before common stockholders receive any. Preferred stock usually includes a predetermined dividend amount, written either as a percentage of the par value or a specified dollar amount. When dividends are paid, each share of preferred stock receives the predetermined amount. Common stockholders receive dividends after the obligation to the preferred stockholders has been satisfied. The dividend paid to common stockholders is limitless.
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