Portfolio Alerts

Mar 1, 2024


DEFINITION:
A stock is a unit of ownership in a company If you own a stock, that makes you a shareholder, meaning that you may be eligible to receive dividends if the company succeeds and decides to pay them out. Also, you may have a vote in some company decisions

Understanding a stock

Stocks are an important part of the global economy, allowing companies to raise money for the operation of their businesses by selling shares (or pieces of ownership) to the public. Shares can be bought or sold via an exchange, such as the New York Stock Exchange (NYSE) or Nasdaq. In limited cases, stocks can be sold privately. Specific regulations set by the Securities Exchange Commission (SEC) govern how companies can manage or distribute their stocks. Stocks can be either common stock, which gives shareholders voting rights on certain company decisions, or preferred stock, which gives shareholders no voting rights, but often guarantees them fixed dividend payment in perpetuity.

EXAMPLE
If a company has 100 shares of stock outstanding, and you own 1 share, you own 1% of that company. The value of your shares will represent approximately that percentage (1%) of the company’s market capitalization, or the value of all outstanding shares

Takeaway

Imagine that you want to own a cupcake shop, but you only have $1,000 to start. In order to buy the necessary supplies (e.g., flour, icing, cupcake tins), you might raise money from friends and family. Let’s pretend that four of your friends each kick in $1,000, so you have $5,000 total and you’re able to get the business off the ground. In exchange for their investment, you might agree to give each of them 20% of the business and its profits, but they would also participate in any losses the business may take. This is kind of how stocks work, except on a much larger level.