Stocks and Shares Terminology
Before investing in the stock market, you should have a basic understanding of stock and share terminology. There are different types of stock, and they can be traded on different stock exchanges and in different ways. Learning the basics can protect you from losses to some degree.
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Stocks and Shares
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A stock is an instrument that indicates ownership in a corporation. Ownership is divided into shares, and an individual or other entity owns a percentage of the company equal to the percentage of the number of shares held. For example, when a company with 100 shares sells you five shares, you own 5 percent of the company. Stock ownership represents a proportional claim on the corporation's assets and profits. Those who own shares in a company are called shareholders.
Types of Stock
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There are several popular types of stock that are issued. Common stock is the type of stock most people own. Common stock represents ownership in the company and investors get a proportional claim on the profits in the form of dividends. Shareholders are entitled to one vote per share to elect members of the board. Preferred stock confers ownership in a company, but the shareholder does not have voting rights. If the company is liquefied, preferred stockholders are paid before common stockholders. Preferred stock may give the company the right to purchase the shares back at any time, making them "callable." Preferred stocks have features in common with some bonds.
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Trading Stock
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Stocks are mainly traded on stock exchanges, like the New York Stock Exchange, which trades stock for some of the largest companies in the country. Orders are placed by customers at a brokerage house and are given to floor brokers at the exchange. The stockbrokers go to a location known as a trading post where prices for the stock are determined by auction. The price of a stock is the highest amount a buyer will pay, and the lowest price the seller is willing to sell. Much of the activity is computerized. The NASDAQ is an over-the-counter exchange, and all trading is completed via electronically. Many large technology companies are listed with the NASDAQ. There are other, smaller stock exchanges in the United States and around the world.
Limit Orders
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A person buying or selling a stock can place a limit order. The limit order instructs the broker to buy or sell a stock at a specified price or better. The buy limit authorizes the broker to buy the stock at the limit price or lower. The sell limit order means that the stock can be sold at the specified limit price or higher. There is no guarantee that the trade will be executed under a limit order, but a limit order will ensure that the investor will not pay any more than a predetermined price for any given stock.
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