| In financial terminology, stock is the capital raised | | | | capital by offering stock on more than one |
| by a corporation, through the issuance and | | | | exchange, in today's era of electronic trading, |
| distribution of shares. A shareholder is any person | | | | there is little opportunity for private investors to |
| or organization which holds shares, or fractions of | | | | make profit on pricing discrepancies between one |
| shares, of a corporation's stock. The aggregate | | | | stock exchange and another. As such, arbitrage |
| value of a corporation's issued shares is its | | | | opportunities disappear almost immediately due to |
| market capitalization. | | | | the efficient nature of the market. |
| In the United Kingdom, the word stock has a | | | | Buying There are various methods of buying and |
| completely different meaning in finance, referring | | | | financing stocks. The most common means is |
| to a bond. It can also be used more widely to | | | | through a stock broker. Whether they are a full |
| refer to all kinds of marketable securities. | | | | service or discount broker, they are all doing one |
| However, the usage of "share" (as in the stock | | | | thing—arranging the transfer of stock |
| issued by a corporation) is the same. | | | | from a seller to a buyer. Most of the trades are |
| The owners of a company may want additional | | | | actually done through brokers listed with a stock |
| capital to invest in new projects within the | | | | exchange such as the New York Stock Exchange. |
| company. They may also simply wish to reduce | | | | There are many different stock brokers from |
| their holding, freeing up capital for their own | | | | which to choose such as full service brokers or |
| private use. | | | | discount brokers. The full service brokers usually |
| By selling shares they can sell part or all of the | | | | charge more per trade, but give investment |
| company to many part-owners. | | | | advice or more personal service; the discount |
| The purchase of one share entitles the owner of | | | | brokers offer little or no investment advice but |
| that share to literally share in the ownership of | | | | charge less for trades. Another type of broker |
| the company a fraction of the decision-making | | | | would be a bank or credit union that may have a |
| power, and potentially a fraction of the profits, | | | | deal set up with either a full service or discount |
| which the company may issue as dividends. | | | | broker. |
| In the common case of a publicly traded | | | | There are other ways of buying stock besides |
| corporation, where there may be thousands of | | | | through a broker. One way is directly from the |
| shareholders, it is impractical to have all of them | | | | company itself. If at least one share is owned, |
| making the daily decisions required to run a | | | | most companies will allow the purchase of shares |
| company. Thus, the shareholders will use their | | | | directly from the company through their |
| shares as votes in the election of members of | | | | investor's relations departments. |
| the board of directors of the company. | | | | However, the initial share of stock in the |
| In a typical case, each share constitutes one vote | | | | company will have to be obtained through a |
| (except in a co-operative society where every | | | | regular stock broker. Another way to buy stock |
| member gets one vote regardless of the number | | | | in companies is through Direct Public Offerings |
| of shares he holds). Corporations may, however, | | | | which are usually sold by the company itself. A |
| issue different classes of shares, which may have | | | | direct public offering is an initial public offering in |
| different voting rights. Owning the majority of the | | | | which the stock is purchased directly from the |
| shares allows other shareholders to be out-voted | | | | company, usually without the aid of brokers. |
| - effective control rests with the majority | | | | When it comes to financing a purchase of stocks |
| shareholder (or shareholders acting in concert). In | | | | there are two ways: purchasing stock with |
| this way the original owners of the company | | | | money that is currently in the buyers ownership |
| often still have control of the company. | | | | or by buying stock on margin. Buying stock on |
| Shareholder rights Although owning 51% of shares | | | | margin means buying stock with money |
| does mean that you own 51% of the company, it | | | | borrowed against the stocks in the same account. |
| does not give you the right to use a company's | | | | These stocks, or collateral, guarantee that the |
| building, equipment, materials, or other property. | | | | buyer can repay the loan; otherwise, the |
| This is because the company is considered a legal | | | | stockbroker has the right to sell the stocks |
| person, thus it owns all its assets itself. This is | | | | (collateral) to repay the borrowed money. He can |
| important in areas such as insurance, which must | | | | sell if the share price drops below the margin |
| be in the name of the company and not the main | | | | requirement, at least 50 percent of the value of |
| shareholder. | | | | the stocks in the account. |
| In most countries, including the United States, | | | | Buying on margin works the same way as |
| boards of directors and company managers have | | | | borrowing money to buy a car or a house using |
| a fiduciary responsibility to run the company in the | | | | the car or house as collateral. |
| interests of its stockholders. | | | | Moreover, borrowing is not free; the broker |
| Nonetheless, as Martin Whitman writes: "...it can | | | | usually charges 8-10 percent interes Selling Selling |
| safely be stated that there does not exist any | | | | stock is procedurally similar to buying stock. |
| publicly traded company where management | | | | Generally, the investor wants to buy low and sell |
| works exclusively in the best interests of OPMI | | | | high, if not in that order (short selling); although a |
| [Outside Passive Minority Investor] stockholders. | | | | number of reasons may induce an investor to sell |
| Instead, there are both "communities of interest" | | | | at a loss. |
| and "conflicts of interest" between stockholders | | | | As with buying a stock, there is a transaction fee |
| (principal) and management (agent). This conflict is | | | | for the broker's efforts in arranging the transfer |
| referred to as the principal/agent problem. It | | | | of stock from a seller to a buyer. This fee can be |
| would be naive to think that any management | | | | high or low depending on which type of |
| would forego management compensation, and | | | | brokerage, discount or full service, handles the |
| management entrenchment, just because some | | | | transaction. |
| of these management privileges might be | | | | After the transaction has been made, the seller is |
| perceived as giving rise to a conflict of interest | | | | then entitled to all of the money. An important |
| with OPMIs." [Whitman, 2004, 5] Even though the | | | | part of selling is keeping track of the earnings. |
| board of directors runs the company, the | | | | Importantly, on selling the stock, in jurisdictions |
| shareholder has some impact on the company's | | | | that have them, capital gains taxes will have to be |
| policy, as the shareholders elect the board of | | | | paid on the additional proceeds, if any, that are in |
| directors. Each shareholder typically has a | | | | excess of the cost basis. |
| percentage of votes equal to the percentage of | | | | Stock Price Fluctuation The price of a stock |
| shares he or she owns. So as long as the | | | | fluctuates fundamentally due to the law of Supply |
| shareholders agree that the management (agent) | | | | and demand. Like all commodities in the Market, |
| are performing poorly they can elect a new board | | | | the price of a stock is directly proportional to the |
| of directors which can then hire a new | | | | demand. However, there are many factors on |
| management team. In practice, however, | | | | basis of which the demand for a particular stock |
| genuinely contested board elections are rare. | | | | may increase or decrease. These factors are |
| Board candidates are usually nominated by insiders | | | | studied using methods of Fundamental analysis |
| or by the board of the directors themselves, and | | | | and Technical analysis to predict the changes in |
| a considerable amount of stock is held and voted | | | | the stock price. |
| by insiders. | | | | Technology's influence on trading Stock trading |
| Owning shares does not mean responsibility for | | | | has evolved tremendously. |
| liabilities. If a company goes broke and has to | | | | Since the very first Initial Public Offering (IPO) in |
| default on loans, the shareholders are not liable in | | | | the 13th century,[citation needed] owning shares |
| any way. However, all money obtained by | | | | of a company has been a very attractive |
| converting assets into cash will be used to repay | | | | incentive. Even though the origins of stock trading |
| loans and other debts first, so that shareholders | | | | go back to the 13th century, the market as we |
| cannot receive any money unless and until | | | | know it today did not catch on strongly until the |
| creditors have been paid (most often the | | | | late 1800s. |
| shareholders end up with nothing). | | | | Co-production between technology and society |
| Means of financing Financing a company through | | | | has led the push for effective and efficient ways |
| the sale of stock in a company is known as | | | | of trading. |
| equity financing. Alternatively, debt financing (for | | | | Technology has allowed the stock market to |
| example issuing Bonds) can be done to avoid | | | | grow tremendously, and all the while society has |
| giving up shares of ownership of the company. | | | | encouraged the growth. |
| Unofficial financing known as trade financing usually | | | | Within seconds of an order for a stock, the |
| provides the major part of a company's working | | | | transaction can now take place. Most of the |
| capital (day-to-day operational needs). Trade | | | | recent advancements with the trading have been |
| financing is provided by vendors and suppliers who | | | | due to the Internet. |
| sell their products to the company at short-term, | | | | The Internet has allowed online trading. |
| unsecured credit terms, usually 30 days. | | | | In contrast to the past where only those who |
| Equity and debt financing are usually used for | | | | could afford the expensive stock brokers, anyone |
| longer-term investment projects such as | | | | who wishes to be active in the stock market can |
| investments in a new factory or a new foreign | | | | now do so at a very low cost per transaction. |
| market. Customer provided financing exists when | | | | Trading can even be done through |
| a customer pays for services before they are | | | | Computer-Mediated Communication (CMC) use of |
| delivered, e.g. subscriptions and insurance. | | | | mobile devices such as handheld computers and |
| Trading A stock exchange is an organization that | | | | cellular phones. These advances in technology |
| provides a marketplace (either physical or virtual) | | | | have made day trading possible. |
| for trading shares, where investors (represented | | | | The stock market has grown so that some argue |
| by stock brokers) may buy and sell shares in a | | | | that it represents a country's economy. This |
| wide range of companies. A given company will | | | | growth has been enjoyed largely to the credibility |
| usually list its shares in only one exchange by | | | | and reputation that the stock market has earned. |
| meeting and maintaining the listing requirements of | | | | Types of shares There are several types of |
| that particular stock exchange. In the United | | | | shares, including common stock, preferred stock, |
| States, through the inter-market quotation | | | | treasury stock, and dual class shares. |
| system, stocks listed on one exchange can also | | | | Preferred stock, sometimes called preference |
| be bought or sold on several other exchanges, | | | | shares, have priority over common stock in the |
| including relatively new internet-only exchanges. | | | | distribution of dividends and assets, and sometime |
| Stocks are broadly grouped into NYSE-listed and | | | | have enhanced voting rights such as the ability to |
| NASDAQ-listed stocks and exchanges where | | | | veto mergers or acquisitions or the right of first |
| NYSE-listed stocks may be bought are generally | | | | refusal when new shares are issued (i.e. the holder |
| not the same group as the exchanges where | | | | of the preferred stock can buy as much as they |
| NASDAQ-listed stocks may be bought. Many large | | | | want before the stock is offered to others). A |
| foreign companies choose to list on a U.S. | | | | multiple class equity structure has several classes |
| exchange as well as an exchange in their home | | | | of shares (for example Class A, Class B, and |
| country in order to broaden their investor base. | | | | Class C) each with its own advantages and |
| These shares are called American Depository | | | | disadvantages. Treasury stock is shares that |
| Receipts (ADRs). Large U.S. companies also list in | | | | have been bought back from the public. Treasury |
| foreign exchanges for the same reason. Although | | | | Stock is considered issued but not outstanding. |
| it makes sense for some companies to raise | | | | |