What is a Stock?
A stock, otherwise known as “shares” or “equity,” is a unit of ownership in a company, entitling the stockholder to a piece of a company’s assets and revenue.
Stocks are an important component of the global economy, which allow companies to raise money for the operation of their businesses by selling shares to the public. Shares of stock can be bought or sold via an exchange, such as the NYSE or Nasdaq. Or, 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 the stockholder voting rights on issues of company governance, or preferred — which gives the stockholder no voting rights, but does often guarantee a fixed dividend payment in perpetuity.
If a company has 100 million shares of stock outstanding, and you own 1,000 shares of stock, you own 0.001% of that company. The value of your shares will represent approximately that percentage (0.001%) of the company’s market capitalization, or the value of all outstanding shares.
A stock is like a (really, really, really thin) slice of birthday cake...
The company is the cake. Your slice is your stock. The more slices you have, the more of the cake you own.
The Romans were the first to use a stock-like instrument as a way of ensuring their citizens had a vested interest in public works. Contractors who were hired by the state would sell an instrument resembling stock in their businesses to raise capital for projects. This was known as ‘lease holding.’
Fast forward to the 1600s and the time of the East India Company (EIC). Widely regarded as the first joint-stock company in the world, the EIC made its name from trading in commodities throughout the Indian Ocean region. Today’s limited liability company (LLC) is a descendant of the joint-stock company.
Bonds are different than stocks. Unlike stocks, bonds are debt-based, which means investors lend money to the company or government issuing the bond and in return, receive interest. The holder of a bond does not have ownership in the company — however, they may have more protection than a stockholder. Another difference between stocks and bonds is that stocks are usually traded on an exchange, whereas a bond is usually over the counter (the investor needs to deal directly with the issuing company, government, or other entity).
Futures and Options are different than stocks in that they are derivatives, which means that their value is based on another asset — such as commodities, shares, currencies, etc. They are contracts — based on the fluctuation of underlying assets — rather than ownership of the asset itself.
The ‘stock market’ is a broad term that encompasses a collection of markets where the regular buying, selling, and issuance of stocks in publicly held companies takes place.
The stock market is an umbrella term for these markets. The stock market is made up of various individual stock exchanges. The most well-known of these stock exchanges in the United States are: the New York Stock Exchange (NYSE), Nasdaq, the Better Alternative Trading System (BATS), and the Chicago Board Options Exchange (CBOE). These exchanges — along with several others — make up the U.S. stock market.
While it is called the ‘stock market’ (or the ‘equity market’), other financial instruments — such as bonds, commodities, currencies, and derivatives — are also traded on the stock market.
If you own stock in a company, often it will fall into this category. One of the key benefits of common stock is voting rights — with each share usually equating to one vote. Investors who hold common stock can attend annual general meetings and vote on corporate issues like electing people to the board, stock splits, or general company strategy.
Investors who do not need to vote on corporate issues and are interested in receiving a consistent dividend check will usually choose a preferred stock. There are many features that mirror that of a bond. For example, preferred stock can be repurchased by the company at an agreed price.
What is First In, First Out (FIFO)?
First in, first out (FIFO) is one way companies estimate the value of inventory without tracking each item — by assuming the oldest goods are sold first.
What is Cum Laude?
Cum laude is a distinction awarded to graduating students from a university who meet a certain threshold – typically determined by GPA, class percentile rank, or an exemplary level of achievement.
What is Marketing?
Marketing is the process that companies go through to increase awareness about their products and services and convince consumers to buy them.
What is the Dow Jones Industrial Average (DJIA)?
The Dow Jones Industrial Average is a group of stocks, called an index, that tracks in 30 shares in some of the largest companies in the United States.
What is a Fiscal Year?
A fiscal year (often abbreviated “FY”) is a 12-month period used by companies and governments for financial reporting and budgeting that sometimes follows the January - December calendar year and sometimes doesn’t.