Investment Princple Articles
Articles are written with the goal to educate and
simplify the fundamental financial and investing topics. Information gathered
for these articles are researched from credible websites, texts, and notes.
What is Stock?
Simply put, a share of stock represents the partial ownership of a company. If
Company X has 1 million shares of common stock, and you purchase 20,000 shares,
you now effectively own 2% of Company X. Why would a company want to sell
itself? Without going into capital structuring issues, simply someone decided to
raise money by selling portions of the company rather than taking on loans.
Stock usually comes in two distinct classes, common stock and preferred stock.
For this article we will focus on common stock which is what you hear most
about. Many times companies will keep a majority ownership of their stock (>50%)
so as to retain all the controlling rights to the company and resist any
takeovers. So now that you are a partial owner, what rights exactly do you have?
Owning stock gives you votes in selecting the board of directors. These elected
directors are there to act in the best interests of shareholders by maximizing
share prices. They do this by electing and paying the CEO and management.
So how does one make money through stock? As
a partial owner, you are entitled to partial profits of the company. This is
paid out as dividends, which are apportioned by the board of directors. All
profits are usually not paid as dividends, as money is needed for continuing
operations and reinvestment, and dividends are not always paid. Also gains, or
losses, are realized upon selling of stock shares. So how can one tell what the
price of a stock is at any point in time? Fundamentally a stock is worth the sum
of discounted value of a company’s future profits. In actuality though many
factors weigh into the price of a stock, which can be very complicated and risky
to estimate.