What is stock?

Stock is the amount of capital paid into a business by its investors. Stock is divided into shares, which are held by investors in the form of stock certificates. Each share represents a fraction of the total ownership of a company. 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 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.

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 the stockholder to sell his shares. Alternatively, a stockholder can have the restriction removed under Rule 144, which has a mandatory holding period.

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.

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 fulfilled. If a company declares bankruptcy, this usually means that the holdings of all investors are either severely reduced or completely eliminated.

An alternative definition of stock is the finished goods inventory that a company has on hand and available for sale.

Related Topics

Stock accounting
What are dividends?
What are retained earnings?
What are the stockholders' equity accounts?
What are the types of share capital?