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.