{"id":679,"date":"2010-08-25T16:26:10","date_gmt":"2010-08-25T20:26:10","guid":{"rendered":"http:\/\/thestockmarketwatch.com\/learn-stock-market\/?p=679"},"modified":"2016-04-25T17:36:28","modified_gmt":"2016-04-25T21:36:28","slug":"stocks-basics-what-are-stocks","status":"publish","type":"post","link":"https:\/\/www2.stockmarketwatch.com\/learn\/stocks-basics-what-are-stocks\/","title":{"rendered":"2) Stocks Basics: What Are Stocks?"},"content":{"rendered":"

Stock is a share in the ownership of a company.\u00a0 It is a claim of the company\u2019s assets and liabilities.\u00a0 The more stocks you have, the higher your ownership stake in the company.\u00a0 Stock, equity, shares \u2013 these all mean the same thing.<\/p>\n

Being a Stocks Owner<\/strong><\/p>\n

If you own stock in a company, then you are one of the shareholders (also called stockholder).\u00a0 This means that you have a claim to all that the company owns, even if a very small share.\u00a0 With this, you are entitled to the earnings of the company and voting rights with it. Being a shareholder, however, does not mean that you have a say in how to run the business.\u00a0 It only entitles you one vote per share in electing the board of directors at annual meetings.<\/p>\n

As proof of your stock ownership, you are given a stock certificate.\u00a0 At this age, it is kept electronically, not in paper, otherwise known as holding shares \u201cin street name.\u201d\u00a0 In the past, when the stock owner wanted to sell his share, he has to physically take the certificate to the brokerage.\u00a0 Now, one can just use a computer or make a phone call.\u00a0 In essence, the electronic version makes shares easier to trade.<\/p>\n

The company\u2019s management aims to increase the value of the firm.\u00a0 If not, then the shareholders can vote to have the management replaced \u2013 at least in theory.\u00a0 In reality, individual investors do not have enough shares to have that big an influence on the company.\u00a0 Large institutional investors and billionaires are really the ones who make the decisions.<\/p>\n

Not being able to make decisions is not a big deal as a shareholder.\u00a0 The idea after all is having someone else make the money.\u00a0 What is important is getting a portion of the company\u2019s profits and a claim on assets.\u00a0 These profits are sometimes referred to as dividends.\u00a0 This loosely translates to:\u00a0 more shares = more profit.\u00a0 Asset claim only becomes significant if a company goes bankrupt.\u00a0 If it is a liquidation case, you get paid after all creditors have been paid.<\/p>\n

Another important stock feature is limited liability.\u00a0 If a company is not able to pay its debts, you hold no accountability.\u00a0 Partnerships, on the other hand, are designed such that if the partner goes bankrupt, creditors can come after the partners (shareholders).\u00a0 Owning a stock, therefore, means losing only the value of your investment but not your personal assets.<\/p>\n

Debt and Equity<\/strong><\/p>\n

What is the purpose of issuing stock?\u00a0 Why should founders sell stocks to thousands of people they don\u2019t know?\u00a0 This is because of the company\u2019s need to raise money.\u00a0 They can do this by borrowing or selling part of the company.\u00a0 To borrow, the company either loans from a bank or issues bonds.\u00a0 These methods are called debt financing.\u00a0 Stock issuance is called equity financing.\u00a0 When issuing stocks, the company does not have to pay back the money or pay interest payments.\u00a0 Shareholders only hope that their shares will earn more than what they paid for.\u00a0 Initial public offerings (IPO) is the first sale of a stock issued by the private company.<\/p>\n

Now we come to understanding between a company that finances through debt and one that finances through equity. The former guarantees the return of your money along with interest payments.\u00a0 In the latter, you assume the risk of a company\u2019s demise by being an owner.\u00a0 If the company goes bankrupt and liquidates, you do not get any money until the bondholders have been paid.\u00a0 This is called absolute priority.\u00a0 If the company is successful, shareholders earn a lot and vise-versa.<\/p>\n

Risk<\/strong><\/p>\n

Individual stocks have no guarantee.\u00a0 Other companies may pay out dividends, others may not.\u00a0 Without dividends, investors can make money only through a stock\u2019s appreciation in the open market.<\/p>\n

Taking on a risk is not at all negative.\u00a0 A greater risk may signal greater return of investment.\u00a0 This is why stocks have historically performed better than bonds or savings account.\u00a0 On a long-term basis, stock investment has an average return of 10-12%.<\/p>\n

Next Section:<\/strong> Different Types of Stocks<\/a><\/p>\n