Stock definition
/What is Stock?
Stock is a security that represents a fraction of the ownership of the issuing corporation. Investors by stocks in the expectation that their value will increase, allowing the investors to eventually sell them for a profit. The stocks may also pay out dividends on an annual or quarterly basis. Thus, there are two ways to generate income from your stock holdings. Historically, the overall return on stocks have been higher than the rate of inflation.
Stock Certificates
Stock is issued to investors in the form of stock certificates. For example, if a company has 1,000,000 shares outstanding and an investor owns a stock certificate for 100,000 shares, then that investor owns 10% of the company's stock. A stock certificate is a legal document that states the number of shares of ownership that the investor holds in the company, as well as the class of stock owned. There may be a restriction statement on the back of the certificate that restricts the ability of the stockholder to sell the certificate to another investor. Typically, a company must have a registration statement approved by the Securities and Exchange Commission before the restriction can be removed from the stock certificate, which enables stockholders to sell their shares. Alternatively, a stockholder can have the restriction removed under Rule 144, which has a mandatory holding period.
Acquisition and Sale of Stock
Stocks may be acquired or sold on a stock exchange or via a private sale. A sale on a stock exchange is a relatively simple transaction, but can only be accomplished if the issuer has registered the shares, has been accepted by the applicable stock exchange, and is current in its filings with the Securities and Exchange Commission.
Common Stock
Common stock is the baseline form of stock, and includes the right to vote on certain corporate decisions, such as the election of a board of directors. In the event of a corporate liquidation, the common stockholders are paid their share of any remaining assets after all creditor claims have been settled. If a company declares bankruptcy, this usually means that the holdings of all investors are either severely reduced or completely eliminated.
Preferred Stock
A company may issue either common stock or preferred stock. Preferred stock has special rights, which can vary by class of preferred stock. These rights typically include a fixed dividend amount, and may also include special voting rights. Startup companies frequently offer several series of preferred stock during their early growth stages, when they obtain several tranches of investment from investors,
Par Value
A share may have a face value, which is known as its par value. The par value is usually quite small, with $0.01 per share being a common amount. If a share has no face value, then it is said to be no-par stock. The minimum par value requirement is set by the state government in which a company is incorporated.
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Stocks vs. Bonds
Stock represents an ownership interest in a business, for which there is no expectation of repaying investors. Conversely, bonds represent a form of financing for which there is an expectation of repayment. Another difference is that stockholders are not paid interest on their common stock investments, while the payment of interest is a standard requirement for a bond. A third difference is that bondholders are given priority over shareholders in the event of a corporate liquidation, which reduces the risk level for the bondholders. Conversely, stockholders have a significant risk of not being paid at all in the event of a corporate liquidation.
Stock as Inventory
An alternative definition of stock is the finished goods inventory that a company has on hand and available for sale. Management needs to maintain enough stock on hand to fulfill customer orders within a reasonable period of time, but not so much stock that there is a risk of product obsolescence, or of maintaining too large an investment in working capital. Some businesses prefer to maintain large amounts of stock on-site, so that they can fulfill customer orders at once. They typically charge higher prices in exchange for this level of service, which offsets the cost of holding the extra inventory. Others try the reverse approach, where they charge much lower prices, but maintain no stock at all. In this case, customers have to wait for the goods to be sourced or manufactured, which may involve a long wait.
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