Stock Basics

stock marketsThe Definition of a Stock

Simply put, a stock is a share in the ownership of a company. Stocks represent claims on the company’s assets and earnings. As you acquire more stock, your ownership stake in the company becomes greater. Whether you say shares, equity, or stock, it all means the same thing.

Having Stock Means Being a Part Business Owner

Holding a company’s stock means that you are one of the many owners (shareholders) of a company and, as such, you have a claim to everything the company owns. Yes, this means that technically you own a tiny sliver of every piece of furniture, every trademark, and every contract of the company.  As an owner, you are entitled to your share of the company’s earnings as well as any voting rights attached to the stock.

A stock is historically represented by a stock certificate. This is a fancy piece of paper that is proof of your ownership. In today’s computer age, most of the time you won’t use or see this document because your brokerage keeps these records electronically.  This is done to make the shares easier to trade and manage. You still own the shares, they are just in digital form. If you really want a paper stock certificate, you can order them.

Having Stock Means Getting a Cut Of the Profits

So why is owning shares such a big deal? In a word, profit. The importance of being a shareholder is that you are entitled to a portion of the company’s profits and have a claim on its assets. Profits are sometimes paid out in the form of dividends or other special payments. The more shares you own, the larger the portion of the profits you get. Your claim on assets is only relevant if a company goes bankrupt. In case of liquidation, you’ll receive what’s left after all the creditors have been paid. This last point is worth repeating: the importance of stock ownership is your claim on profits and assets. Without this, the stock would just a worthless fiction.

Shareholders Get to Vote

The management of the company is supposed to increase the value of the firm for shareholders.  If this doesn’t happen, the shareholders can vote to have the management removed, at least in theory.  In reality, individual investors often don’t own enough shares to have a material influence on the company. In practice only large institutional investors, high-net worth individuals or management itself control major companies.  In terms of the amount of shares owned compared to hedge funds, small investors are literally like fleas on the back of a rhinoceros.

Stocks Usually Have Limited Liability

Another extremely important feature of stocks is limited liability, which means that, as an owner of a stock, you are not personally liable if the company is not able to pay its debts. Other companies such as partnerships are set up so that if the partnership goes bankrupt the creditors can come after the partners (shareholders) personally and seize their assets. Owning stock means you have limited liability in that the maximum value you can lose is the value of your investment – your personal assets are protected, thus providing you some limited protections in the event of a worst case scenario.

Risks of Owing Stocks

Stocks can be super risky. There are many, many examples of people who have lost everything in the stock market. There are a number of sources of risk for stocks, the sum total of which are hard for even professional investors to calculate.  These include: political risk, stock market risk, company management risk, risks related to the weather, commodities & commodities pricing risk, risk related to investor sentiment as well as plain old bad luck.

There are no guarantees when it comes to individual stocks.  Some companies pay out dividends, but many others do not. And there is no obligation to pay out dividends even for those firms that have traditionally given them. Without dividends, an investor has fewer options for making money with their shares – they can be used as collateral for a loan or they may be sold for a profit – but in general you have fewer options once dividends are taken away.

Join our newsletter

Screen_shot_2017-04-25_at_1.05.57_pm

Subscribe to get the latest "Engineer Your Finances" content via email.

Powered by ConvertKit
1 Response

Leave a Reply

This blog is kept spam free by WP-SpamFree.

SSCP   CAS-002   9L0-066   350-050   642-999   220-801   74-678   642-732   400-051   ICGB   c2010-652   70-413   101-400   220-902   350-080   210-260   70-246   1Z0-144   3002   AWS-SYSOPS   70-347   PEGACPBA71V1   220-901   70-534   LX0-104   070-461   HP0-S42   1Z0-061   000-105   70-486   70-177   N10-006   500-260   640-692   70-980   CISM   VCP550   70-532   200-101   000-080   PR000041   2V0-621   70-411   352-001   70-480   70-461   ICBB   000-089   70-410   350-029   1Z0-060   2V0-620   210-065   70-463   70-483   CRISC   MB6-703   1z0-808   220-802   ITILFND   1Z0-804   LX0-103   MB2-704   210-060   101   200-310   640-911   200-120   EX300   300-209   1Z0-803   350-001   400-201   9L0-012   70-488   JN0-102   640-916   70-270   100-101   MB5-705   JK0-022   350-060   300-320   1z0-434   350-018   400-101   350-030   000-106   ADM-201   300-135   300-208   EX200   PMP   NSE4   1Z0-051   c2010-657   C_TFIN52_66   300-115   70-417   9A0-385   70-243   300-075   70-487   NS0-157   MB2-707   70-533   CAP   OG0-093   M70-101   300-070   102-400   JN0-360   SY0-401   000-017   300-206   CCA-500   70-412   2V0-621D   70-178   810-403   70-462   OG0-091   1V0-601   200-355   000-104   700-501   70-346   CISSP   300-101   1Y0-201   200-125  , 200-125  , 100-105  , 100-105  , 1Z0-803  , 400-051   EX300  , CISM   100-105  , 000-106   400-201   642-732   220-902   70-410  , MB6-703   810-403   70-243  , CAS-002  , AWS-SYSOPS   70-462   70-410   2V0-621   LX0-103   70-461  , 220-902   1Z0-144   70-178   70-270   350-080  , 1Y0-201   1z0-808  , NSE4   102-400  , ADM-201   SSCP  , 200-125  , 640-911   000-104   640-692   300-320   350-060   000-089  , 000-017   1z0-808   700-501   1Z0-051  , 70-177   M70-101   300-209   70-461   3002   N10-006   VCP550   70-487   300-320  , 3002   700-501   NS0-157  , 1V0-601   CAS-002