Everyone would have come across the term stock at some point or the other in their life. But many will not have a clear understanding about what actually a stock is. The stock is the share of ownership in an organization. It represents the claim one has on the organization’s earnings and assets. As one acquires more stocks, the stake of ownership in that organization becomes greater.
However, the stockholders or the shareholders do not actually own the company, but they own the shares issued by the organization. As per the law, the company is treated as a legal person. It can file taxes, own property and borrow money. Hence, the company will only own its assets and not the shareholders.
Owning of stocks gives you the power to vote in the meetings conducted by the shareholders, give you the power to sell shares to others and also receive the dividends as and when it is declared. When you hold the majority of share, the voting power increases for you so that you could indirectly have good control over the company’s decision.
Markets dealing with the stocks
Sometimes the stocks are referred to as equities and it is issued by the organization to raise money to grow the business or undertake any new projects. There are two markets to buy the shares from the primary market and secondary market.
Primary market- In the primary market, the shares are directly sold by the company.
Secondary market- The shares are sold by the existing shareholders to others in the secondary market. The shares are sold for the sole purpose to earn a profit.
Different types of shares
The two kinds of stocks which the organizations can issue are called as preferred stock and common stock.
Preferred stock- It is very much similar to bonds and it does not usually come with any voting rights. In the case of preferred stock, the investors are given a guarantee of a payment of fixed dividend. Another benefit associated with this stock is that, at the time of liquidation, the preferred shareholders will be given priority in paying off before the payment is done for common shareholders but only after other debt holders are paid off. Another feature of this stock is that the organization has the option to again re-purchase the stocks later on from the preferred shareholders at any point in time. Hence it is also known as callable shares.
Common stock- Whenever the people mention about the shares, they are normally referring to the common stock. The organization mostly issues this type of stock. These stocks have a claim on the dividends and also have the voting rights. The common stocks give a higher rate of return but it comes with a cost. It comes with a high-risk factor as the investor has a chance of losing all the money if the organization gets closed down or bankrupt. The common stockholders will receive their payment once the money is paid to the bondholders, creditors and preferred shareholders.