Stocks
Stock is simply a share or a part of the company, which once purchased, makes the shareholder one of the owners of that company. The shareholder is entitled to part of all that the corporation owns, which also includes the benefits.
Logically, a private company has thousands of shareholders and a particular shareholder’s part might be significantly small. In the earlier days, stock purchasing was done through the brokerage agency which provided paperwork and documentation of the purchased stock. Today, the paperwork has disappeared and stock trading is now done electronically with the click of a mouse, through the broker’s computer who has huge stocks data base, updated instantly.
Shareholder’s rights are limited in the annual shareholder’s meeting to vote the company’s board of directors, who they wish to lead the company. Company’s benefits are distributed as a dividend among all the share holders. In case of bankruptcy, the shareholder is not held responsible financially for the debts the company holds and no creditor can turn against the shareholder for the company’s debts. The maximum the shareholder can lose is the amount the stock is worth for.
The company shares the profit without any liability with its thousands of shareholders, because the company was in need of cash fluidity earlier.
In order to grow and acquire liquid from general investors, the company sold their shares. The already owner of the company, acquires the maximum number of shares before distributing the shares to the public. There is no obligation to any company to distribute its dividends. Some companies distribute its dividends and some companies do not.
People make money constantly through stocks trading in their appreciation value, which is dependent on the stock exchange market. Generally, profit is made by purchasing stocks in low value and selling them in the higher value.
Types of Stock:
Stocks are typically categorized in 2 types:
- Common Stock: Common stocks carry voting rights which can be exercised in the corporate stockholder’s meeting.
- Preferred Stock: They do not have voting rights but legally they are entitled to receive certain share of dividends, before issuing it to the other shareholders.
Apart from common and preferred stock, companies can customize different classes according to their needs such as they can categorize their shareholders in 2 classes where class A can cast vote ten times per share whereas, class B can cast vote once per share.
Convertible preferred stock is the preferred stock that holds the option to convert the preferred stock into limited number of common stocks after defined time span. Preferred stocks can be of hybrid nature which could have qualities of a bond (with fixed income) and voting rights (as that of a common stock).