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What is a Stock?

definition

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.

🤔 Understanding a stock

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.

example

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.

Takeaway

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.

Tell me more...

What is the history of stocks?
What are stocks vs. other instruments?
How does the stock market work?
What are the different types of stocks?
What are some common stock terms?
How to trade stocks with Robinhood?

What is the history of stocks?

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.

What are stocks vs. other instruments?

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.

How does the stock market work?

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.

What are the different types of stocks?

Common stock

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.

Preferred stock

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 are some common stock terms?

  • Free/public float: Stock that has been released to the market and is traded publicly through an exchange.
  • Stock splits: If a company wishes to make its stock price more accessible to investors, it will conduct a stock split. This will not change the market capitalization of the company — or the overall value of the shares you own — but it will increase the number of shares available.
  • Stockholders equity: In its most basic form, it is the assets that remain in a company after covering all the bills (liabilities). This metric can be used to get a better understanding of the value of the stock.
  • Short selling: When an investor wishes to speculate on a fall in the stock price, they can “short” a position. This requires borrowing the stock from either a broker or a financial institution.
  • Stock purchase plan: An offer of discounted stock to an employee by an employer.
  • Blue-chip stocks: Large, well-capitalized companies fall into the blue-chip category. They are usually traded on the main stock exchanges – such as the NYSE or the Nasdaq.
  • Broker: A broker will execute trades on behalf of an investor/trader and receive a commission in return.
  • Buying on margin: Buying on margin is borrowing money to buy securities.
  • Pink sheet stocks: Small companies that trade below the $5 threshold are usually referred to as ‘penny’ or ‘pink-sheet’ stocks. They are traded over the counter and can be high risk.
  • Market/limit/stop orders: When opening a trade, an investor needs to choose between a range of order types. A market order is executed at the next available price and can be risky if the stock price has a widespread (the difference between the buyers and sellers are offering). A limit order sets a maximum price to pay – this can mean that the order may not always get filled, particularly if the market moves quickly. Stop orders allow investors to set a trigger price in the system, which will only execute in the event the price hits the desired level.

How to trade stocks with Robinhood?

  1. Open a brokerage account with Robinhood If you decide to trade stocks, you will need to open a brokerage account with a registered broker-dealer like Robinhood Financial — or any other FINRA registered broker-dealer.
  2. Choose a stock from the platform The next step is to choose the desired stock you wish to trade. It is always important to do your own due diligence and research before entering a trade.
  3. Specify the type of order (market, limit, or stop) There a range of different order types available - depending on order time preference.
  4. Trade is executed, and you will receive a confirmation note Once the stock price matches your entry-level, a trade will be executed.
  5. Stock will now sit in your portfolio When the trade is completed, you will receive a confirmation note and will be able to view your new stock in your portfolio.
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This information is educational, and is not an offer to sell or a solicitation of an offer to buy any security. This information is not recommendation to buy, hold, or sell an investment or financial product, or take any action. This information is neither individualized nor a research report, and must not serve as the basis for any investment decision. All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results or returns. Before making decisions with legal, tax, or accounting effects, you should consult appropriate professionals. Information is from sources deemed reliable on the date of publication, but Robinhood does not guarantee its accuracy.
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