A stock represents limited ownership of a company - the
smallest share possible. In order to raise capital company's issues stocks and
investors who buy stock are actually buying a portion of the company.
Ownership, even a small share, gives investors rights to a
say in how the company is run and a share in the profits (if any). While stocks
give owners certain rights, in case the company defaults or faces a lawsuit they
do not carry obligation. The stock will become insignificant but that is the
limit to the investor's liability in a worst-case scenario.
For raising the capital, companies
issue stocks. To expand or to acquire new properties, they may require a cash
injection.
Each stock issue is limited to a certain number of shares, and when
they are issued, they are given a par value. The market quickly adjusts that
par value according the perceived health of the company and its probability for
growth.
Since the investors believe the company will continue to
grow and the value of their shares will rise accordingly, they usually buy
stocks.
Investors who get hold of a stock in a new company are taking more of a
risk than buying shares of entrenched companies but the potential gain is much
greater. An exponential rise in the values is seen by those who bought
Microsoft shares early in the game (and did not sell them).
Stocks have the potential to earn more money when compared
with savings investments (like bonds or bank certificates of deposit) -- but
they also contain the risk of loss.
In can help minimize loss by learning about
the stock market and the various investment strategies, and most investors find
they do much better on the stock market than is likely with any kind of savings
investment.
How a Stock is Represented?
Stock Certificate represents a stock. This is a fancy piece
of paper that is proof of your ownership.
You won't actually get to see this
document in today's computer age since our brokerage keeps these records by
electronic means, which is also known as holding shares "in street
name".
This is done to make the shares easier to trade. When a person
wanted to sell his or her shares in the past, that person physically took the
certificates down to the brokerage. Now, trading makes life easier for
everybody with a click of the mouse or a phone call.
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