Business, Legal & Accounting Glossary
Stock is a kind of investment in a company, which is assumed to make profits in future. Stock can be compared with a loan, which does not carry a payback guarantee. Any company issues a number of stocks for the public. Investors in exchange for money get a certain number of stocks of that company. Stocks issued by any company provide the investors with ownership in that corporation.
Stock is a security issued in the form of shares that represent ownership interests in a company. There is both common stock (often simply called “stock,” “shares,” or “equity”) and preferred stock. Common stockholders elect the company’s board of directors and actively participate in the company’s success (or failure) through a rising (or falling) stock price. Common stockholders may also receive dividends, provided the company is profitable, obligations to commercial creditors and bondholders have been met, and the board sees fit to declare them. In the event of liquidation, however, common stockholders have no right to assets until all other obligations of the firm have been met. Common stockholders may have “pre-emptive” rights to maintain their percentage ownership of the firm. For example, a common stockholder with 100 of the 1,000 outstanding shares of the company, or 10%, may (or may not) have the right to buy 10 shares of a new issue of 100 shares. Preferred stockholders, in turn, are generally guaranteed dividends at a fixed rate, but they have limited voting rights.
There is a simple way to get the concept of stock. Lets deal with an example, where a company named “Apollon” sells its stock at a rate of $10 per stock. An investor pays $30 and buys 3 shares of Appollon stock. Thus, the stock is a generic term used to represent a bit of the ownership of a company.
On the basis of the ownership powers, stock can be differentiated as voting stock and preferred stock.
This type of stock carries voting powers. Any investor if possesses a certain number of voting stocks gets the power to vote on matters of corporate policies of any company. The investor can also vote for appointing members for the board of directors of the company.
Preferred stock is a higher-ranking stock. Owners of these stocks get special powers, which is negotiated by company owner and investor himself. These types of stocks do not carry any voting rights but carry superior rights like dividends and other bonuses. The terms and condition between investor and issuer of this type of stock is stated in a “Certificate of Designation”.
Stock represents a portion of ownership in a company. Stockholders bear profits or losses of the company. Continuing the example used in the above section, we can understand the uses of stock in a better way. An investor after paying $30, owns three shares of stock of Apollon. If the company prospers and raises its stock price to $15 per stock, the investor can gain money. He can sell his three shares at $15 and earn $45, which is a profit of $15. If the investor has faith in the company and assumes that the company will prosper further then he waits for the stock prices to rise even higher. If the adverse happens that is company incurs losses and stock prices lower, then stockholders have to sell shares at a lower price. In this way, shareholders also bear loss of the company.
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This glossary post was last updated: 29th March, 2020