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