How Does Stock Work?

With global events and raging inflation rates proving financial talking points over the years, one thing that keeps being spelt is that huge concentrations of wealth have a considerable role to play. These manifest as companies and firms, the control of which is largely with executives. As a consumer in a largely capitalist world, getting a stake in these companies could be quite the hassle. It is not the case that every interested person could end up a company executive, even if they wanted to. In a bid to not be alienated entirely from participating in such important institutions, investors can control a stake in these companies through stock investing.

What Are Stocks?

Stocks are financial security that confers a certain measure of ownership of a corporation on a stockholder. It consists of shares that are usually sold to investors to raise funds for the corporation; based on the kind of stock, it involves an equivalent degree of privileges. They are otherwise regarded as equities, and their value is directly proportional to the corporation’s value. As such, stock investing is simply buying a part of a company.

History of Stocks

Stocks came into existence in the early 17th century in Amsterdam, when the Dutch East India Company put up units of its ownership for sale to raise funds. However, stock investing assumed the look of the phenomenon it is now after it made its way into the mainstream United States economy in the later 18th century. For most of its earlier centuries, stocks were physically traded and owned securities. The inception of the digital age allowed stocks to be traded electronically, ushering in a new era for stock investing and ownership. Stocks are acquired directly from the company in a primary market system or a reselling shareholder in a secondary market system.

How Do Stocks Work?

Shares are component units of stock. Shares are units of ownership of a corporation, which means shareholders can lay claim to a certain percentage of that institution in proportion to the amount of shares held. By virtue of the legal personalities corporations possess, shareholders may own but not control the corporation’s assets. This means that a corporation’s assets cannot be arbitrarily sold or possessed by shareholders, nor can shareholders shoulder a corporation’s liabilities in their capacities.

Shares function as a measurement of a shareholder’s voting power and an indicator of the shareholder’s entitlement to the corporation’s turnover. In simpler terms, stock investing gives share owners the power to vote for and against the corporation’s decisions, giving them control over the company’s direction. This can come in ways such as appointing executives and directors. In addition, some kinds of shares pay shareholders dividends from the corporation’s profits, in line with the percentage of shares owned out of the total shares available. For instance, Investor A owning 100 out of 1000 total shares means A has a 10% voting power and a 10% right to the company’s profits as dividends. However, there are variations in how these arrangements play out, which would lead to a discussion of what kinds of stocks there are.

Types of Stocks

  • Common Stocks: Common stocks constitute a stock class that most often offers voting rights to a shareholder. Eponymously, it is the most common and basic stock class and gives its holders as many votes as shares held at shareholders’ meetings. One share usually equals one vote, and it is not uncommon to see several investors pooling their shares together to have superior voting strength through a mutual fund. Some common stocks also offer dividends but are usually lower on the priority list compared to preferred shareholders. It is as severe as saying common shareholders cannot be sure they will receive dividends. Moreover, they are also the last to receive payouts in the event of bankruptcy, which means they may not receive any payments. However, that is not to say common stocks do not offer any financial value. Common stocks usually derive their real value from how well a company performs, which means investors typically look to buy common stocks of high potential companies.
  • Preferred Stocks: Not all corporations offer preferred stocks. Preferred stocks seem to sacrifice some features of common stocks to guarantee others. They are known to pay guaranteed dividends, usually higher than common stocks dividends, as well as guaranteed payouts in the event of liquidation or bankruptcy. However, they do not come with voting rights, and the company can choose to buy back preferred stocks at will. Usually, preferred shareholders have the option to convert their stock to common stock as well, depending on what kind of stock investing they are looking at then.

Conclusion

In a nutshell, stocks are securities that offer shareholders partial ownership of a corporation. This entitles them to benefits from the corporation’s profits and risk from its losses. Stock investing could be common or preferred, with common stocks usually easier to procure and riskier to own. Altogether, stocks give corporations a chance to raise operational funds while they offer individuals a hitherto nonexistent stake in companies of their choosing.

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