What is Stock?

When first learning about investing, many people are confused by the names for the various elements of the markets, because those names seem to change very often, depending on how the element is being discussed.

One of the most basic vehicles of investment is stock. Stock is simply another name for a quantity of shares in a given corporation. One of the many unique things corporations can do is issue shares of stock: official instruments of ownership of a certain percentage of that company's assets. Most people are introduced to the idea of stock by a stock exchange, which is simply a formalized market where shares of stock can be traded.

It is possible to own shares of stock that are never traded. A business owner can incorporate her flower shop, issue all of the stock to herself, run the business until she retires, sell the company's assets and dissolve the corporation with that stock never having more than one owner, and with that company never being listed on an exchange.

The reason corporations issue stock is because one of the essential purposes of a corporation is to assemble investors, and since investment in a company is often disproportional, it is necessary to have a way to recognize, for example, that one investor owns 50% of a company while several others might only own 5% each.

Stock also represents a voting interest in many companies. Most publically traded companies, for example, issue stock that empowers the shareholder to cast a ballot for the Board of Directors of that company. This is what often causes a "majority shareholder" to garner such attention in a large company. It is because any individual shareholder owning more than 50% of the voting stock in a company can, with no opposition, essentially appoint directors to the Board by voting all of their stock for their choice of candidate.

Many corporations pay dividends, or certain percentages of their profits, to their shareholders. Most corporations report dividends on a "per-share" basis, and those dividends are often paid quarterly, earning a shareholder the per-share dividend for each share of stock they own. Many companies also issue different "classes" of stock with different dividend rates. Some of these additional classes are called "preferred" stock which sometimes pay dramatically higher dividends.

Corporations are able, by authority of their own Boards of Directors, to issue many different kinds of stock aside from just a simple share. Some stock is issued without voting rights, and is known as "non-voting" stock. Those shareholders that own non-voting stock still own a certain percentage of that company's assets. They are simply excluded from casting ballots for directors. Other stock can be issued with much more powerful voting rights. For example, a company could issue one share of stock with the same voting authority as one hundred standard shares.

Investors buy stock for two primary reasons. The first is they want the price of that stock to increase. The second is sometimes to collect the dividends on those shares, which can sometimes be a substantial portion of the return on the investment.