A simple definition of stocks is a share of ownership in a particular company.  You may also hear them referred to as stock shares or equity.

In the old days before computers, a stock share was identified with a certificate.  When you purchased stock in a company, you were issued a stock certificate with the number of shares you had purchased.  You then placed this certificate in a safety deposit box and maintained possession of it as you would any other asset.  This is not necessary with the advent of computers.

When a company wants to generate cash for its continuing operations or to purchase a company, it can either borrow the money or it can issue stock.  That is it sells a portion of the ownership of the company to whoever purchases the stock.

Holding a company’s stock means you are a part owner of the company.  Technically you do own a small part of each of the assets of the company and are entitled to a share of the earnings or loss of the company.  You also can vote on the leaders or officers of the company and certain regulations or changes the company wants to make.  Once a year you can even attend a shareholder meeting where you can meet the officers and vote in person.

Since you own a portion of the company and are entitled to a portion of the company’s earnings, when the company does well or the other owners or potential owners think the company will do well, the value of your stock increases.  That is, someone is willing to pay more for a share of stock because of the belief that the value will increase in the future.

In addition to the potential increase of your investment through the increase of the cost of a share of stock, some companies also pay dividends.  They will pay a sort of interest on the amount of shares you own.  They are choosing to share a portion of their earnings directly through this process.

There are two types of stock.  One is called common stock and the other is called preferred stock.  Even though it is called preferred stock, it is generally not the preferred stock to own.  It is called preferred because if there are any dividends paid, they are paid to the preferred stock owners first.  Also in a liquidation of the company, the preferred stock owners will get paid first.  However, the preferred stock owners do not have the right to vote on the officers and the value of their stock will generally not increase on the open market.

Another benefit of common stocks is that they are highly liquid for the most part.  There is usually always a market where the shares can be traded.

Tags: Common Stock, Preferred Stock, Shareholder, Stock Share, Stocks