What is a Stock?

A claim over a company's assets and its ownership

What is a stock?

When a person owns stock in a company, the individual is called a shareholder and is eligible to claim part of the company’s residual assets and earnings (should the company ever have to dissolve). A stockholder may also be referred to as a shareholder. The terms stock, shares and equity are often interchangeable in modern financial language.

Most finance career paths will be directly involved with stocks in one way or another, either as an advisor, an issuer or a buyer.

Benefits of owning stock

Claim on assets: A shareholder can claim assets of a company it has stock in. The claims of an asset are relevant only when the company faces liquidation charges. All of assets and liabilities will be counted, and after all creditors are paid, the shareholders can claim what is left. This is the reason equity (stocks) are higher risk than debt (credit, loans and bonds); creditors are paid before equity holders, and if there are no assets left after debt is paid, the equity holders may receive nothing.

Dividends: Stockholder may also receive earnings, which are paid in the form of dividends. The company can decide the percentage of dividends paid in one period, or it can decide to retain all of the earnings to expand the business further. Aside from dividends, the stockholder can also enjoy capital gains from stock price appreciation.

Power to vote: Another powerful feature of stock is shareholders are entitled to vote for management change if the company is mismanaged. The executive board of a company will hold annual meetings to report overall company performance. They disclose guidance for future period operations and management decisions. Should investors and stockholders notice anything amiss, they have the power to negotiate change in management.

Limited Liability: Lastly, when a person own shares of a company, the nature of ownership is limited. Should the company go bankrupt, shareholders are not personally liable for any loss.

Risks of owning stock

Stock can depreciate: There is no guarantee that price will move up. An investor may buy shares at $50 during an IPO, but find that the shares move down to $20 as the company begins to perform badly, for example.

Liquidation preference: When a company liquidates, creditors are paid before equity holders are. In most cases, a company will only liquidate when it has very little assets left to operate. In most cases, this means that there are no assets left for equity holders once creditors are paid off.

Irrelevant power to vote: While retail investors technically have the share of votes in executive board meetings, in practice, they have no power. The majority shareholder often decides these votes.

Modern stock trading

In the past, shares were represented on a piece of paper as a certificate. When a person wanted to purchase shares, they needed to physically visit the office of a broker and make the transaction there. Today, shares are rarely seen as certificates. Brokers keep entire documents electronically, and an investor need only click through online trading platforms to purchase shares.

What affect shares prices?

There are many factors that affect shares prices. These can be the global economy, sector performance, government policies, natural disasters and much more. Investor sentiment also plays a large part in dictating price, and two of the most examined ratios of stock are the following:

  • Revenue growth
  • Earnings growth

Revenue will tell analysts how company performance on the product or service it offers, and where or not its customers love what it does. Earnings will show how efficient the company manages its operation and produce profit from it. Both are very high-level indicators that can be used as references on whether or not to purchase shares. However, stock analysis use many other ratios and tools to help investors profit in equity trading.

No matter what your job in finance, you will be involved with stocks in one way or another.