HOME

TheInfoList




In finance, stock (also capital stock) consists of all of the
shares In financial markets A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known ...
into which ownership of a
corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal ...

corporation
or company is divided.Longman Business English Dictionary:
"stock - ''especially AmE'' one of the shares into which ownership of a company is divided, or these shares considered together"
"When a company issues shares or stocks ''especially AmE'', it makes them available for people to buy for the first time."
(Especially in American English, the word "stocks" is also used to refer to shares.) A single share of the stock means fractional ownership of the corporation in proportion to the total number of shares. This typically entitles the
shareholder A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a Trust law, trust or partnership) that is registered by the corporation as the ...
(stockholder) to that fraction of the company's earnings, proceeds from liquidation of assets (after discharge of all senior claims such as secured and unsecured
debt Debt is an obligation that requires one party, the debtor A debtor or debitor is a legal entity (legal person) that owes a debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to ...

debt
), or voting power, often dividing these up in proportion to the amount of money each stockholder has invested. Not all stock is necessarily equal, as certain classes of stock may be issued for example without voting rights, with enhanced voting rights, or with a certain priority to receive profits or liquidation proceeds before or after other classes of shareholders. Stock can be bought and sold privately or on
stock exchange A stock exchange, securities exchange, or bourse is an exchange Exchange may refer to: Places United States * Exchange, Indiana Exchange is an Unincorporated area, unincorporated community in Green Township, Morgan County, Indiana, Green To ...
s, and such transactions are typically heavily regulated by governments to prevent fraud, protect investors, and benefit the larger economy. The stocks are deposited with the depositories in the electronic format also known as Demat account. As new shares are issued by a company, the ownership and rights of existing shareholders are diluted in return for cash to sustain or grow the business. Companies can also buy back stock, which often lets investors recoup the initial investment plus
capital gains Capital gain is an economic concept defined as the profit Profit may refer to: Business and law * Profit (accounting) Profit, in accounting, is an income distributed to the ownership , owner in a Profit (economics) , profitable market p ...
from subsequent rises in stock price.
Stock options In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availa ...
issued by many companies as part of employee compensation do not represent ownership, but represent the right to buy ownership at a future time at a specified price. This would represent a windfall to the employees if the option is exercised when the market price is higher than the promised price, since if they immediately sold the stock they would keep the difference (minus taxes).


Shares

A person who owns a percentage of the stock has the ownership of the corporation proportional to their share. The shares form stock. The stock of a corporation is partitioned into
shares In financial markets A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known ...
, the total of which are stated at the time of business formation. Additional shares may subsequently be authorized by the existing shareholders and issued by the company. In some jurisdictions, each share of stock has a certain declared
par value Par value, in finance and accounting, means stated value or face value. From this come the expressions at par (at the par value), over par (over par value) and under par (under par value). Bonds A Bond_(finance), bond selling at par is priced at 1 ...
, which is a nominal accounting value used to represent the equity on the
balance sheet In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...

balance sheet
of the corporation. In other jurisdictions, however, shares of stock may be issued without associated par value. Shares represent a fraction of
ownership Ownership is the state or fact of exclusive right In Anglo-Saxon law Anglo-Saxon law (Old English Old English (, ), or Anglo-Saxon, is the earliest recorded form of the English language English is a West Germanic languages, West Germ ...
in a business. A
business Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit." Having a business name A trad ...

business
may declare different types (or classes) of shares, each having distinctive ownership rules, privileges, or share values. Ownership of shares may be documented by issuance of a
stock certificate In corporate law Corporate law (also known as business law or enterprise law or sometimes company law) is the body of law governing the rights, relations, and conduct of persons, companies, organizations and businesses. The term refe ...

stock certificate
. A stock certificate is a legal document that specifies the number of shares owned by the
shareholder A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a Trust law, trust or partnership) that is registered by the corporation as the ...
, and other specifics of the shares, such as the par value, if any, or the class of the shares. In the
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain,Usage is mixed. The Guardian' and Telegraph' use Britain as a synonym for the United Kingdom. Some prefer to use Britain as shorth ...

United Kingdom
,
Republic of Ireland Ireland ( ga, Éire ), also known as the Republic of Ireland ('), is a country in north-western Europe consisting of 26 of the 32 Counties of Ireland, counties of the island of Ireland. The capital and largest city is Dublin, on the eastern ...

Republic of Ireland
,
South Africa South Africa, officially the Republic of South Africa (RSA), is the Southern Africa, southernmost country in Africa. With over Demographics of South Africa, 60 million people, it is the world's List of countries by population, 23rd-most ...

South Africa
, and
Australia Australia, officially the Commonwealth of Australia, is a Sovereign state, sovereign country comprising the mainland of the Australia (continent), Australian continent, the island of Tasmania, and numerous List of islands of Australia, sma ...

Australia
, ''stock'' can also refer, less commonly, to all kinds of
marketable securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any fo ...
.


Types

Stock typically takes the form of shares of either
common stock Common stock is a form of corporate equity Equity may refer to: Finance, accounting and ownership *Equity (finance), ownership of assets that have liabilities attached to them ** Stock, equity based on original contributions of cash or other va ...
or
preferred stock Preferred stock (also called preferred shares, preference shares, or simply preferreds) is a component of share capital__NOTOC__ A corporation A corporation is an organization—usually a group of people or a company—authorized by the stat ...
. As a unit of ownership, common stock typically carries
voting rights Suffrage, political franchise, or simply franchise, is the right to vote in public, political elections (although the term is sometimes used for any right to vote Voting is a method for a group, such as a meeting or an Constituency, ele ...
that can be exercised in corporate decisions.
Preferred stock Preferred stock (also called preferred shares, preference shares, or simply preferreds) is a component of share capital__NOTOC__ A corporation A corporation is an organization—usually a group of people or a company—authorized by the stat ...
differs from common stock in that it typically does not carry voting rights but is legally entitled to receive a certain level of
dividend A dividend is a distribution of profit Profit may refer to: Business and law * Profit (accounting), the difference between the purchase price and the costs of bringing to market * Profit (economics), normal profit and economic profit * Profit ...

dividend
payments before any dividends can be issued to other shareholders.Zvi Bodie, Alex Kane, Alan J. Marcus, ''Investments'', 9th Ed., . Convertible preferred stock is preferred stock that includes an
option Option or Options may refer to: Computing *Option key, a key on Apple computer keyboards *Option type, a polymorphic data type in programming languages *Command-line option, an optional parameter to a command *OPTIONS, an Hypertext Transfer Prot ...
for the holder to convert the preferred shares into a fixed number of common shares, usually any time after a predetermined date. Shares of such stock are called "convertible preferred shares" (or "convertible preference shares" in the UK). New
equity Equity may refer to: Finance, accounting and ownership *Equity (finance), ownership of assets that have liabilities attached to them ** Stock, equity based on original contributions of cash or other value to a business ** Home equity, the differe ...
issue may have specific legal clauses attached that differentiate them from previous issues of the issuer. Some shares of common stock may be issued without the typical voting rights, for instance, or some shares may have special rights unique to them and issued only to certain parties. Often, new issues that have not been registered with a securities governing body may be restricted from resale for certain periods of time. Preferred stock may be
hybrid Hybrid may refer to: Economics and finance * Hybrid market, a system allowing stock trades to be completed either electronically or manually * Hybrid security, a type of economic instrument Technology Electrical power generation * Hybrid generato ...
by having the qualities of bonds of fixed returns and common stock voting rights. They also have preference in the payment of dividends over common stock and also have been given preference at the time of liquidation over common stock. They have other features of accumulation in dividend. In addition, preferred stock usually comes with a letter designation at the end of the security; for example, Berkshire-Hathaway Class "B" shares sell under stock ticker BRK.B, whereas Class "A" shares of ORION DHC, Inc will sell under ticker OODHA until the company drops the "A" creating ticker OODH for its "Common" shares only designation. This extra letter does not mean that any exclusive rights exist for the shareholders but it does let investors know that the shares are considered for such, however, these rights or privileges may change based on the decisions made by the underlying company.


Rule 144 stock

"
Rule 144 The Securities Act of 1933, also known as the 1933 Act, the Securities Act, the Truth in Securities Act, the Federal Securities Act, and the '33 Act, was enacted by the United States Congress on May 27, 1933, during the Great Depression and after ...
Stock" is an American term given to shares of stock subject to SEC Rule 144: Selling Restricted and Control Securities. Under Rule 144, restricted and controlled securities are acquired in unregistered form. Investors either purchase or take ownership of these securities through private sales (or other means such as via ESOPs or in exchange for seed money) from the issuing company (as in the case with Restricted Securities) or from an affiliate of the issuer (as in the case with Control Securities). Investors wishing to sell these securities are subject to different rules than those selling traditional common or preferred stock. These individuals will only be allowed to liquidate their securities after meeting the specific conditions set forth by SEC Rule 144. Rule 144 allows public re-sale of restricted securities if a number of different conditions are met.


Stock derivatives

A stock
derivative In mathematics Mathematics (from Greek: ) includes the study of such topics as numbers (arithmetic and number theory), formulas and related structures (algebra), shapes and spaces in which they are contained (geometry), and quantities ...
is any financial instrument for which the
underlying In finance, the underlying of a derivative In mathematics Mathematics (from Ancient Greek, Greek: ) includes the study of such topics as quantity (number theory), mathematical structure, structure (algebra), space (geometry), and calculu ...
asset is the price of an equity.
Futures Futures may mean: Finance *Futures contract, a tradable financial derivatives contract. *Futures exchange, a financial market where futures contracts are traded. *Futures (magazine), ''Futures'' (magazine), an American finance magazine. Music *Fu ...
and options are the main types of derivatives on stocks. The underlying security may be a
stock index In finance, a stock index, or stock market index, is an Index (economics), index that measures a stock market, or a subset of the stock market, that helps investors compare current stock price levels with past prices to calculate market performan ...
or an individual firm's stock, e.g.
single-stock futuresIn finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money available w ...
. Stock futures are contracts where the buyer is
long Long may refer to: Measurement * Long, characteristic of something of great duration Duration may refer to: * The amount of Time#Terminology, time elapsed between two events * Duration (music) – an amount of time or a particular time interval, ...
, i.e., takes on the obligation to buy on the contract maturity date, and the seller is , i.e., takes on the obligation to sell. Stock index futures are generally delivered by cash settlement. A
stock option In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availa ...
is a class of option. Specifically, a
call option A call option, often simply labeled a "call", is a contract, between the buyer and the seller of the call option, to exchange a security Security is freedom from, or resilience against, potential Potential generally refers to a currently un ...

call option
is the right (''not'' obligation) to buy stock in the future at a fixed price and a
put option In finance Finance is a term for the management, creation, and study of money In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in ...

put option
is the right (''not'' obligation) to sell stock in the future at a fixed price. Thus, the value of a stock option changes in reaction to the underlying stock of which it is a
derivative In mathematics Mathematics (from Greek: ) includes the study of such topics as numbers (arithmetic and number theory), formulas and related structures (algebra), shapes and spaces in which they are contained (geometry), and quantities ...
. The most popular method of valuing stock options is the
Black–Scholes model The Black–Scholes or Black–Scholes–Merton model is a mathematical model for the dynamics of a financial market containing Derivative (finance), derivative investment instruments. From the partial differential equation in the model, known as ...
. Apart from call options granted to employees, most stock options are transferable.


History

During the
Roman Republic The Roman Republic ( la, Rēs pūblica Rōmāna ) was a state of the classical Roman civilization, run through public In public relations Public relations (PR) is the practice of managing and disseminating information from an indiv ...
, the state contracted (leased) out many of its services to private companies. These government contractors were called ''publicani'', or ''societas publicanorum'' as individual companies. These companies were similar to modern corporations, or
joint-stock companies A joint-stock company is a business entity In law, a legal person is any person A person (plural people or persons) is a being that has certain capacities or attributes such as reason, morality, consciousness or self-consciousness, and be ...
more specifically, in a couple of aspects. They issued shares called ''partes'' (for large cooperatives) and ''particulae'' which were small shares that acted like today's over-the-counter shares. Polybius mentions that "almost every citizen" participated in the government leases. There is also evidence that the price of stocks fluctuated. The Roman orator Cicero speaks of ''partes illo tempore carissimae'', which means "shares that had a very high price at that time". This implies a fluctuation of price and stock market behavior in Rome. Around 1250 in
France France (), officially the French Republic (french: link=no, République française), is a transcontinental country This is a list of countries located on more than one continent A continent is one of several large landmasses ...

France
at
Toulouse Toulouse ( , ; oc, Tolosa ) is the prefecture A prefecture (from the Latin Latin (, or , ) is a classical language belonging to the Italic languages, Italic branch of the Indo-European languages. Latin was originally spoken in the area ...

Toulouse
, 100 shares of the ''Société des Moulins du Bazacle'', or
Bazacle Milling Company The Society of Moulins du Bazacle was founded in Toulouse Toulouse ( , ; oc, Tolosa ; la, Tolosa ) is the capital of the French departments of France, department of Haute-Garonne and of the regions of France, region of Occitanie. The city is o ...
were traded at a value that depended on the profitability of the mills the society owned. As early as 1288, the
Swedish Swedish or ' may refer to: * Anything from or related to Sweden, a country in Northern Europe * Swedish language, a North Germanic language spoken primarily in Sweden and Finland * Swedish alphabet, the official alphabet used by the Swedish langua ...

Swedish
mining and forestry products company
Stora Stora Enso Oyj (from sv, Stora and fi, Enso ) is a manufacturer of pulp, paper and other forest productA forest product is any material derived from forestry for direct consumption or commercial use, such as lumber, paper, or forage for liv ...

Stora
has documented a stock transfer, in which the Bishop of Västerås acquired a 12.5% interest in the mine (or more specifically, the mountain in which the
copper Copper is a chemical element In chemistry, an element is a pure Chemical substance, substance consisting only of atoms that all have the same numbers of protons in their atomic nucleus, nuclei. Unlike chemical compounds, chemical elem ...

copper
resource was available, the
Great Copper Mountain Falun Mine (Swedish: ''Falu Gruva'') was a mine in Falun Falun () is a city A city is a large human settlement.Goodall, B. (1987) ''The Penguin Dictionary of Human Geography''. London: Penguin.Kuper, A. and Kuper, J., eds (1996) ''The Social S ...
) in exchange for an estate. The earliest recognized joint-stock company in modern times was the English (later British)
East India Company The East India Company (EIC), also known as the Honourable East India Company (HEIC), East India Trading Company (EITC), the English East India Company or (after 1707) the British East India Company, and informally known as John Company, Com ...
, one of the most notorious joint-stock companies. It was granted an English
Royal Charter A royal charter is a formal grant issued by a monarch under royal prerogative The royal prerogative is a body of customary authority, privilege and immunity, recognized in common law In law, common law (also known as judicial precedent or ...

Royal Charter
by
Elizabeth I Elizabeth I (7 September 153324 March 1603) was Queen of England and Ireland Ireland ( ; ga, Éire ; Ulster-Scots: ) is an island upright=1.15, Great_Britain.html"_;"title="Ireland_(left)_and_Great_Britain">Ireland_(left)_an ...

Elizabeth I
on 31 December 1600, with the intention of favouring trade privileges in
India India, officially the Republic of India (Hindi Hindi (Devanagari: , हिंदी, ISO 15919, ISO: ), or more precisely Modern Standard Hindi (Devanagari: , ISO 15919, ISO: ), is an Indo-Aryan language spoken chiefly in Hindi Belt, ...

India
. The Royal Charter effectively gave the newly created ''Honourable East India Company'' (HEIC) a 15-year
monopoly A monopoly (from Greek#REDIRECT Greek Greek may refer to: Greece Anything of, from, or related to Greece Greece ( el, Ελλάδα, , ), officially the Hellenic Republic, is a country located in Southeast Europe. Its population is approxi ...

monopoly
on all trade in the
East Indies 300px, The East Indies (or simply the Indies), is a term used in historical narratives of the Age of Discovery The Age of Discovery, or the Age of Exploration (sometimes also, particularly regionally, Age of Contact or Contact Period), ...
. The company transformed from a commercial trading venture to one that virtually ruled
India India, officially the Republic of India (Hindi Hindi (Devanagari: , हिंदी, ISO 15919, ISO: ), or more precisely Modern Standard Hindi (Devanagari: , ISO 15919, ISO: ), is an Indo-Aryan language spoken chiefly in Hindi Belt, ...

India
as it acquired auxiliary governmental and military functions, until its dissolution. Soon afterwards, in 1602, the
Dutch East India Company The Dutch East India Company, officially the United East India Company ( nl, Vereenigde Oost Indische Compagnie; VOC), was a multinational corporation A multinational company (MNC) is a corporate A corporation is an organization—u ...

Dutch East India Company
issued the first shares that were made tradeable on the
Amsterdam Stock Exchange Euronext Amsterdam is a stock exchange based in Amsterdam, the Netherlands. Formerly known as the Amsterdam Stock Exchange, it merged on 22 September 2000 with the Brussels Stock Exchange and the Paris Stock Exchange to form Euronext. The regi ...
, an invention that enhanced the ability of joint-stock companies to attract capital from investors as they now easily could dispose of their shares. The Dutch East India Company became the first multinational corporation and the first megacorporation. Between 1602 and 1796 it traded 2.5 million tons of cargo with Asia on 4,785 ships and sent a million Europeans to work in Asia, surpassing all other rivals. The innovation of joint ownership made a great deal of
Europe Europe is a continent A continent is any of several large landmass A landmass, or land mass, is a large region In geography Geography (from Greek: , ''geographia'', literally "earth description") is a field of scienc ...

Europe
's
economic growth Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economics, economy over time. Statisticians conventionally measure such growth as the percent rate of i ...

economic growth
possible following the
Middle Ages In the history of Europe The history of Europe concerns itself with the discovery and collection, the study, organization and presentation and the interpretation of past events and affairs of the people of Europe since the beginning of ...
. The technique of pooling capital to finance the building of ships, for example, made the
Netherlands ) , national_anthem = ( en, "William of Nassau") , image_map = EU-Netherlands.svg , map_caption = , image_map2 = BES islands location map.svg , map_caption2 = , image_map3 ...

Netherlands
a
maritime Maritime may refer to: Geography * Maritime Alps, a mountain range in the southwestern part of the Alps * Maritime Region, a region in Togo * Maritime Southeast Asia * The Maritimes, the Canadian provinces of Nova Scotia, New Brunswick, and Prince ...

maritime
superpower A superpower is a state State may refer to: Arts, entertainment, and media Literature * ''State Magazine'', a monthly magazine published by the U.S. Department of State * The State (newspaper), ''The State'' (newspaper), a daily newspaper in Co ...

superpower
. Before the adoption of the joint-stock corporation, an expensive venture such as the building of a merchant ship could be undertaken only by governments or by very wealthy individuals or families. The Dutch stock market of the 17th century included the use of stock futures,
stock options In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availa ...
,
short selling In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money avail ...

short selling
, the use of credit to purchase shares, a speculative bubble that crashed in 1695, and a change in fashion (namely, in headdresses) that unfolded and reverted in time with the market.
Edward Stringham Edward Peter Stringham (born January 18, 1975) is an Austrian School The Austrian School is a Heterodox economics, heterodox Schools of economic thought, school of economic thought that is based on methodological individualism—the concept th ...
also noted that the uses of practices such as short selling continued to occur during this time despite the government passing laws against it. This is unusual because it shows individual parties fulfilling contracts that were not legally enforceable and where the parties involved could incur a loss. Stringham argues that this shows that contracts can be created and enforced without state sanction or, in this case, in spite of laws to the contrary.


Shareholder

A shareholder (or ''stockholder'') is an
individual An individual is that which exists as a distinct entity An entity is something that exists as itself, as a subject or as an object, actually or potentially, concretely or abstractly, physically or not. It need not be of material existence. In ...
or
company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal person, legal or a mixture of both, with a specific objective. Company members share a common pu ...
(including a
corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal ...

corporation
) that legally owns one or more
shares In financial markets A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known ...
of stock in a
joint stock company A joint-stock company is a business entity In law, a legal person is any person or 'thing' (less ambiguously, any legal entity) that can do the things a human person is usually able to do in law – such as enter into contracts, lawsuit, sue ...
. Both private and public traded companies have shareholders. Shareholders are granted special privileges depending on the class of stock, including the right to vote on matters such as elections to the
board of directors A board of directors is a group of people who jointly supervise the activities of an organization An organization, or organisation (Commonwealth English The use of the English language English is a West Germanic languages, W ...
, the right to share in distributions of the company's income, the right to purchase new shares issued by the company, and the right to a company's assets during a
liquidation Liquidation is the process in accounting by which a company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal person, legal or a mixture of ...
of the company. However, shareholder's rights to a company's assets are subordinate to the rights of the company's creditors. Shareholders are one type of
stakeholders Stakeholder may refer to: *Stakeholder (corporate), a group, corporate, organization, member, or system that affects or can be affected by an organization's actions *Project stakeholder, a person, group, or organization with an interest in a projec ...
, who may include anyone who has a direct or indirect equity interest in the
business entity In law Law is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. A system, surrounded and influenced by its environment, is described by ...
or someone with a non-equity interest in a
non-profit organization A nonprofit organization (NPO), also known as a non-business entity, not-for-profit organization, or nonprofit institution, is a legal entity organized and operated for a collective, public or social benefit, in contrast with an entity that o ...
. Thus it might be common to call
volunteer Volunteering is a voluntary act of an individual or group freely giving time and labour for community service. Many volunteers are specifically trained in the areas they work, such as medicine, education, or emergency rescue. Others serve on an ...

volunteer
contributors to an
association Association may refer to: *Club (organization), an association of two or more people united by a common interest or goal *Trade association, an organization founded and funded by businesses that operate in a specific industry *Voluntary association ...
stakeholders, even though they are not shareholders. Although directors and officers of a company are bound by
fiduciary A fiduciary is a person who holds a legal Law is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. A system, surrounded and influenced by ...
duties to act in the best interest of the shareholders, the shareholders themselves normally do not have such duties towards each other. However, in a few unusual cases, some courts have been willing to imply such a duty between shareholders. For example, in
California California is a state State may refer to: Arts, entertainment, and media Literature * ''State Magazine'', a monthly magazine published by the U.S. Department of State * The State (newspaper), ''The State'' (newspaper), a daily newspaper i ...

California
,
USA The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America North America is a continent entirely within the Northern Hemisphere and a ...

USA
, majority shareholders of closely held corporations have a duty not to destroy the value of the shares held by minority shareholders. The largest shareholders (in terms of percentages of companies owned) are often mutual funds, and, especially, passively managed
exchange-traded fund An exchange-traded fund (ETF) is a type of investment fund An investment fund is a way of investment, investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group such as reducing the ...
s.


Application

The owners of a private company may want additional capital to invest in new projects within the company. They may also simply wish to reduce their holding, freeing up capital for their own private use. They can achieve these goals by selling shares in the company to the general public, through a sale on a
stock exchange A stock exchange, securities exchange, or bourse is an exchange Exchange may refer to: Places United States * Exchange, Indiana Exchange is an Unincorporated area, unincorporated community in Green Township, Morgan County, Indiana, Green To ...
. This process is called an
initial public offering An initial public offering (IPO) or stock launch is a public offering A public offering is the offering of securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal defi ...
, or IPO. By selling shares they can sell part or all of the company to many part-owners. The purchase of one share entitles the owner of that share to literally share in the ownership of the company, a fraction of the decision-making power, and potentially a fraction of the profits, which the company may issue as
dividend A dividend is a distribution of profit Profit may refer to: Business and law * Profit (accounting), the difference between the purchase price and the costs of bringing to market * Profit (economics), normal profit and economic profit * Profit ...

dividend
s. The owner may also inherit
debt Debt is an obligation that requires one party, the debtor A debtor or debitor is a legal entity (legal person) that owes a debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to ...

debt
and even
litigation A lawsuit is a proceeding by a party or parties against another in the civil Civil may refer to: *Civic virtue, or civility *Civil action, or lawsuit *Civil affairs *Civil and political rights *Civil disobedience *Civil engineering *Civil ...
. In the common case of a publicly traded corporation, where there may be thousands of shareholders, it is impractical to have all of them making the daily decisions required to run a company. Thus, the shareholders will use their shares as votes in the election of members of the
board of directors A board of directors is a group of people who jointly supervise the activities of an organization An organization, or organisation (Commonwealth English The use of the English language English is a West Germanic languages, W ...
of the company. In a typical case, each share constitutes one vote. Corporations may, however, issue different classes of shares, which may have different voting rights. Owning the majority of the shares allows other shareholders to be out-voted – effective control rests with the majority shareholder (or shareholders acting in concert). In this way the original owners of the company often still have control of the company.


Shareholder rights

Although ownership of 50% of shares does result in 50% ownership of a company, it does not give the shareholder the right to use a company's building, equipment, materials, or other property. This is because the company is considered a legal person, thus it owns all its assets itself. This is important in areas such as insurance, which must be in the name of the company and not the main shareholder. In most countries,
boards of directors A board of directors is a group of people who jointly supervise the activities of an organization, which can be either a for-profit or a nonprofit organization such as a business Business is the activity of making one's living or making mo ...
and company
managers Management (or managing) is the administration of an organization An organization, or organisation (English in the Commonwealth of Nations, Commonwealth English; American and British English spelling differences#-ise, -ize (-isation, -iz ...
have a
fiduciary A fiduciary is a person who holds a legal Law is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. A system, surrounded and influenced by ...
responsibility to run the company in the interests of its stockholders. Nonetheless, as Martin Whitman writes: :...it can safely be stated that there does not exist any publicly traded company where management works exclusively in the best interests of OPMI utside Passive Minority Investorstockholders. Instead, there are both "communities of interest" and "conflicts of interest" between stockholders (principal) and management (agent). This conflict is referred to as the
principal–agent problem The principal–agent problem, in political science Political science is the scientific study of politics Politics (from , ) is the set of activities that are associated with making decisions In psychology, decision-making (also sp ...
. It would be naive to think that any management would forego management compensation, and management entrenchment, just because some of these management privileges might be perceived as giving rise to a conflict of interest with OPMIs. Even though the board of directors runs the company, the shareholder has some impact on the company's policy, as the shareholders elect the board of directors. Each shareholder typically has a percentage of votes equal to the percentage of shares he or she owns. So as long as the shareholders agree that the management (agent) are performing poorly they can select a new board of directors which can then hire a new management team. In practice, however, genuinely contested board elections are rare. Board candidates are usually nominated by insiders or by the board of the directors themselves, and a considerable amount of stock is held or voted by insiders. Owning shares does not mean responsibility for liabilities. If a company goes broke and has to default on loans, the shareholders are not liable in any way. However, all money obtained by converting assets into cash will be used to repay loans and other debts first, so that shareholders cannot receive any money unless and until creditors have been paid (often the shareholders end up with nothing).


Means of financing

Financing a company through the sale of stock in a company is known as
equity Equity may refer to: Finance, accounting and ownership *Equity (finance), ownership of assets that have liabilities attached to them ** Stock, equity based on original contributions of cash or other value to a business ** Home equity, the differe ...
financing. Alternatively,
debt Debt is an obligation that requires one party, the debtor A debtor or debitor is a legal entity (legal person) that owes a debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to ...

debt
financing (for example issuing bonds) can be done to avoid giving up shares of ownership of the company. Unofficial financing known as trade financing usually provides the major part of a company's
working capital Working capital (abbreviated WC) is a financial metric which represents available to a business, organization, or other entity, including governmental entities. Along with fixed assets such as plant and equipment, working capital is considered a ...
(day-to-day operational needs).


Trading

In general, the shares of a company may be transferred from shareholders to other parties by sale or other mechanisms, unless prohibited. Most jurisdictions have established laws and regulations governing such transfers, particularly if the issuer is a publicly traded entity. The desire of stockholders to trade their shares has led to the establishment of
stock exchange A stock exchange, securities exchange, or bourse is an exchange Exchange may refer to: Places United States * Exchange, Indiana Exchange is an Unincorporated area, unincorporated community in Green Township, Morgan County, Indiana, Green To ...
s, organizations which provide marketplaces for trading
shares In financial markets A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known ...
and other derivatives and financial products. Today,
stock trader in Dutch). Stock trading activity, as we know it today, was originally a 17th-century Dutch investing technique. File:NY stock exchange traders floor LC-U9-10548-6.jpg, Historical photo of stock traders and stockbrokers in the trading floor of th ...
s are usually represented by a
stockbroker A stockbroker is a regulated broker A broker is a person or firm who arranges transactions between a Purchasing, buyer and a sales, seller for a commission (remuneration), commission when the deal is executed. A broker who also acts as a seller ...

stockbroker
who buys and sells shares of a wide range of companies on such exchanges. A company may list its shares on an exchange by meeting and maintaining the listing requirements of a particular stock exchange. Many large non-U.S companies choose to list on a U.S. exchange as well as an exchange in their home country in order to broaden their investor base. These companies must maintain a block of shares at a bank in the US, typically a certain percentage of their capital. On this basis, the holding bank establishes American depositary shares and issues an
American depositary receipt An American depositary receipt (ADR, and sometimes spelled ''depository'') is a Negotiable instrument, negotiable security that represents securities of a foreign company and allows that company's shares to trade in the U.S. financial markets. S ...
(ADR) for each share a trader acquires. Likewise, many large U.S. companies list their shares at foreign exchanges to raise capital abroad. Small companies that do not qualify and cannot meet the listing requirements of the major exchanges may be traded
over-the-counter Over-the-counter (OTC) drugs are medicine Medicine is the Art (skill), art, science, and Praxis (process) , practice of caring for a patient and managing the diagnosis, prognosis, Preventive medicine, prevention, therapy, treatment or Palliat ...
(OTC) by an off-exchange mechanism in which trading occurs directly between parties. The major OTC markets in the United States are the electronic quotation systems
OTC Bulletin BoardThe OTC (Over-The-Counter) Bulletin Board or OTCBB is a United States Financial quote, quotation medium operated by the Financial Industry Regulatory Authority (FINRA) for its subscribing members. The board was used for many over-the-counter (finan ...
(OTCBB) and
OTC Markets Group OTC Markets Group (previously known as Pink Sheets) is an American financial market providing price and liquidity Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include: * Market liquidity ...
(formerly known as Pink OTC Markets Inc.) where individual retail investors are also represented by a
brokerage firm A broker is a person or firm who arranges transactions between a buyer and a seller for a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal. Neither role should be conf ...
and the quotation service's requirements for a company to be listed are minimal. Shares of companies in bankruptcy proceedings are usually listed by these quotation services after the stock is delisted from an exchange.


Buying

There are various methods of buying and
financingFunding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm uses i ...
stocks, the most common being through a
stockbroker A stockbroker is a regulated broker A broker is a person or firm who arranges transactions between a Purchasing, buyer and a sales, seller for a commission (remuneration), commission when the deal is executed. A broker who also acts as a seller ...

stockbroker
. Brokerage firms, whether they are a full-service or discount broker, arrange the transfer of stock from a seller to a buyer. Most trades are actually done through brokers listed with a stock exchange. There are many different brokerage firms from which to choose, such as full service brokers or discount brokers. The full service brokers usually charge more per trade, but give investment advice or more personal service; the discount brokers offer little or no investment advice but charge less for trades. Another type of broker would be a
bank A bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), stat ...

bank
or
credit union A credit union, a type of financial institution similar to a commercial bank, is a member-owned financial cooperative, controlled by its members and operated on a not-for-profit basis. Credit unions generally provide services to members simila ...
that may have a deal set up with either a full-service or discount broker. There are other ways of buying stock besides through a broker. One way is directly from the company itself. If at least one share is owned, most companies will allow the purchase of shares directly from the company through their investor relations departments. However, the initial share of stock in the company will have to be obtained through a regular stock broker. Another way to buy stock in companies is through Direct Public Offerings which are usually sold by the company itself. A direct public offering is an
initial public offering An initial public offering (IPO) or stock launch is a public offering A public offering is the offering of securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal defi ...
in which the stock is purchased directly from the company, usually without the aid of brokers. When it comes to
financingFunding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm uses i ...
a purchase of stocks there are two ways: purchasing stock with money that is currently in the buyer's ownership, or by buying stock on margin. Buying stock on margin means buying stock with money borrowed against the value of stocks in the same account. These stocks, or
collateral Collateral may refer to: Business and finance * Collateral (finance) In loan agreement, lending agreements, collateral is a Borrower, borrower's pledge (law), pledge of specific property to a lender, to Secured loan, secure repayment of a loan. ...
, guarantee that the buyer can repay the
loan In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money avai ...
; otherwise, the stockbroker has the right to sell the stock (collateral) to repay the borrowed money. He can sell if the
share price A share price is the price of a single share Share may refer to: * Share, to make joint use of a resource (such as food, money, or space); see Sharing * Share (finance), a stock or other financial security (such as a mutual fund) * Share, Kwara, a ...
drops below the
margin requirement In finance, margin is the collateral (finance), collateral that a holder of a financial instrument has to deposit with a counterparty (most often their broker or an Exchange (organized market), exchange) to cover some or all of the credit risk th ...
, at least 50% of the value of the stocks in the account. Buying on margin works the same way as borrowing money to buy a car or a house, using a car or house as collateral. Moreover, borrowing is not free; the broker usually charges 8–10% interest.


Selling

Selling stock is procedurally similar to buying stock. Generally, the investor wants to buy low and sell high, if not in that order (
short selling In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money avail ...

short selling
); although a number of reasons may induce an investor to sell at a loss, e.g., to avoid further loss. As with buying a stock, there is a transaction fee for the broker's efforts in arranging the transfer of stock from a seller to a buyer. This fee can be high or low depending on which type of brokerage, full service or discount, handles the transaction. After the transaction has been made, the seller is then entitled to all of the money. An important part of selling is keeping track of the earnings. Importantly, on selling the stock, in jurisdictions that have them,
capital gains tax A capital gains tax (CGT) is a tax on the profit realized on the sale of a non-inventory asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (t ...
es will have to be paid on the additional proceeds, if any, that are in excess of the cost basis.


Short selling

Short selling consists of an investor immediately selling borrowed shares and then buying them back when their price has gone down (called "covering").How an Investor Makes Money Short Selling Stocks
Investopedia.com
Essentially, such an investor bets that the price of the shares will drop so that they can be bought back at the lower price and thus returned to the lender at a profit.


Risks of short selling

The risks of short selling stock are usually higher than those of buying stock. This is because the loss can theoretically be unlimited since the stock's value can theoretically go up indefinitely.


Stock price fluctuations

The price of a stock fluctuates fundamentally due to the theory of
supply and demand In microeconomics Microeconomics is a branch of that studies the behavior of individuals and in making decisions regarding the allocation of and the interactions among these individuals and firms. Microeconomics focuses on the study ...

supply and demand
. Like all commodities in the market, the price of a stock is sensitive to demand. However, there are many factors that influence the demand for a particular stock. The fields of
fundamental analysis Fundamental analysis, in accounting and finance, is the analysis of a business's financial statements (usually to analyze the business's assets, Liability (financial accounting), liabilities, and earnings); health; and Competition, competitors an ...
and
technical analysis In finance, technical analysis is an analysis methodology for forecasting the direction of prices through the study of past market data, primarily price and volume. Behavioral economics and Quantitative analysis (finance), quantitative analysis us ...

technical analysis
attempt to understand market conditions that lead to price changes, or even predict future price levels. A recent study shows that customer satisfaction, as measured by the
American Customer Satisfaction IndexThe American Customer Satisfaction Index (ACSI) is an economic indicator that measures the satisfaction of consumers across the U.S. economy An economy (from Greek language, Greek οίκος – "household" and νέμoμαι – "manage") is an ...
(ACSI), is significantly correlated to the market value of a stock. Stock price may be influenced by analysts' business forecast for the company and outlooks for the company's general market segment. Stocks can also fluctuate greatly due to
pump and dump "Pump and dump" (P&D) is a form of securities fraud Securities fraud, also known as stock fraud and investment fraud, is a deceptive practice in the stock or commodity market, commodities markets that induces investors to make purchase or sale ...
scams.


Share price determination

At any given moment, an equity's price is strictly a result of supply and demand. The supply, commonly referred to as the ''
float Float may refer to: Arts and entertainment Music Albums * ''Float'' (Aesop Rock album), 2000 * ''Float'' (Flogging Molly album), 2008 * ''Float'' (Styles P album), 2013 Songs * "Float", by Bush from '' Golden State'', 2001 * "Float," by Eden ...
'', is the number of shares offered for sale at any one moment. The demand is the number of shares investors wish to buy at exactly that same time. The price of the stock moves in order to achieve and maintain
equilibrium List of types of equilibrium, the condition of a system in which all competing influences are balanced, in a wide variety of contexts. Equilibrium may also refer to: Film and television * Equilibrium (film), ''Equilibrium'' (film), a 2002 scien ...
. The product of this instantaneous price and the float at any one time is the
market capitalization Market capitalization, commonly called market cap, is the market value of a publicly traded company A public company, publicly traded company, publicly held company, publicly listed company, or public limited company A public limited compan ...
of the entity offering the equity at that point in time. When prospective buyers outnumber sellers, the price rises. Eventually, sellers attracted to the high selling price enter the market and/or buyers leave, achieving equilibrium between buyers and sellers. When sellers outnumber buyers, the price falls. Eventually buyers enter and/or sellers leave, again achieving equilibrium. Thus, the value of a share of a company at any given moment is determined by all investors voting with their money. If more investors want a stock and are willing to pay more, the price will go up. If more investors are selling a stock and there aren't enough buyers, the price will go down. * Note: "For
Nasdaq The Nasdaq Stock Market () is an American stock exchange A stock exchange, securities exchange, or bourse is an exchange Exchange may refer to: Places United States * Exchange, Indiana Exchange is an Unincorporated area, unincorpora ...
-listed stocks, the price quote includes information on the bid and ask prices for the stock." That does not explain how people decide the maximum price at which they are willing to buy or the minimum at which they are willing to sell. In professional investment circles the
efficient market hypothesis The efficient-market hypothesis (EMH) is a hypothesis in financial economics that states that asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything ...
(EMH) continues to be popular, although this theory is widely discredited in academic and professional circles. Briefly, EMH says that investing is overall (weighted by the
standard deviation In statistics, the standard deviation is a measure of the amount of variation or statistical dispersion, dispersion of a set of values. A low standard deviation indicates that the values tend to be close to the mean (also called the expected v ...

standard deviation
) rational; that the price of a stock at any given moment represents a rational evaluation of the known information that might bear on the future value of the company; and that share prices of equities are priced ''efficiently'', which is to say that they represent accurately the
expected value In probability theory Probability theory is the branch of mathematics concerned with probability. Although there are several different probability interpretations, probability theory treats the concept in a rigorous mathematical manner by exp ...
of the stock, as best it can be known at a given moment. In other words, prices are the result of discounting expected future cash flows. The EMH model, if true, has at least two interesting consequences. First, because financial
risk In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty Uncertainty refers to Epistemology, epistemic situations involving imperfect or unknown information. It applies to predictions of future events, to ...
is presumed to require at least a small premium on expected value, the return on equity can be expected to be slightly greater than that available from non-equity investments: if not, the same rational calculations would lead equity investors to shift to these safer non-equity investments that could be expected to give the same or better return at lower risk. Second, because the price of a share at every given moment is an "efficient" reflection of expected value, then—relative to the curve of expected return—prices will tend to follow a random walk, determined by the emergence of information (randomly) over time. Professional equity investors therefore immerse themselves in the flow of fundamental information, seeking to gain an advantage over their competitors (mainly other professional investors) by more intelligently interpreting the emerging flow of information (news). The EMH model does not seem to give a complete description of the process of equity price determination. For example, stock markets are more volatile than EMH would imply. In recent years it has come to be accepted that the share markets are not perfectly efficient, perhaps especially in emerging markets or other markets that are not dominated by well-informed professional investors. Another theory of share price determination comes from the field of Behavioral Finance. According to Behavioral Finance, humans often make irrational decisions—particularly, related to the buying and selling of securities—based upon fears and misperceptions of outcomes. The irrational trading of securities can often create securities prices which vary from rational, fundamental price valuations. For instance, during the technology bubble of the late 1990s (which was followed by the dot-com bust of 2000–2002), technology companies were often bid beyond any rational fundamental value because of what is commonly known as the "greater fool theory". The "greater fool theory" holds that, because the predominant method of realizing returns in equity is from the sale to another investor, one should select securities that they believe that someone else will value at a higher level at some point in the future, without regard to the basis for that other party's willingness to pay a higher price. Thus, even a rational investor may bank on others' irrationality.


Arbitrage trading

When companies raise capital by offering stock on more than one exchange, the potential exists for discrepancies in the valuation of shares on different exchanges. A keen investor with access to information about such discrepancies may invest in expectation of their eventual convergence, known as arbitrage trading. Electronic trading has resulted in extensive price transparency (efficient-market hypothesis) and these discrepancies, if they exist, are short-lived and quickly equilibrated.


See also

* Arrangements between railroads * Boiler room (business), Boiler room * Bucket shop (stock market), Bucket shop * Buying in (securities) * Concentrated stock * Employee stock ownership * Equity investment * Global Industry Classification Standard, GICS * Golden share * House stock * Insider trading * :Money managers, Money managers * Naked short selling * Penny stock * Scripophily * Social ownership * Stock and flow * Stock dilution * Stock valuation * Stock token * Stub (stock) * Tracking stock * Treasury stock * Traditional and alternative investments * Voting interest


References

{{Authority control Stock market Equity securities Corporate finance