The stock (also capital stock) of a corporation is constituted of the
equity stock of its owners. A single share of the stock represents
fractional ownership of the corporation in proportion to the total
number of shares. In liquidation, the stock represents the residual
assets of the company that would be due to stockholders after
discharge of all senior claims such as secured and unsecured debt.
Stockholders' equity cannot be withdrawn from the company in a way
that is intended to be detrimental to the company's creditors.
2.1 Rule 144 stock
6.2 Means of financing
Stock price fluctuations
Share price determination
8 See also
10 External links
The shares together form stock. The stock of a corporation is
partitioned into shares, 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,
which is a nominal accounting value used to represent the equity on
the 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 in a business. A business may
declare different types (or classes) of shares, each having
distinctive ownership rules, privileges, or share values.
shares may be documented by issuance of a stock certificate. A stock
certificate is a legal document that specifies the number of shares
owned by the shareholder, and other specifics of the shares, such as
the par value, if any, or the class of the shares.
In the United Kingdom, Republic of Ireland, South Africa, and
Australia, stock can also refer to completely different financial
instruments such as government bonds or, less commonly, to all kinds
of marketable securities.
Stock typically takes the form of shares of either common stock or
preferred stock. As a unit of ownership, common stock typically
carries voting rights that can be exercised in corporate decisions.
Preferred stock differs from common stock in that it typically does
not carry voting rights but is legally entitled to receive a certain
level of dividend payments before any dividends can be issued to other
shareholders.[page needed] Convertible preferred stock is
preferred stock that includes an option 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
New equity 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 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 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
Further information: equity derivative
A stock derivative is any financial instrument which has a value that
is dependent on the price of the underlying stock. Futures and options
are the main types of derivatives on stocks. The underlying security
may be a stock index or an individual firm's stock, e.g. single-stock
Stock futures are contracts where the buyer is long, i.e., takes on
the obligation to buy on the contract maturity date, and the seller is
short, i.e., takes on the obligation to sell.
Stock index futures are
generally delivered by cash settlement.
A stock option is a class of option. Specifically, a call option is
the right (not obligation) to buy stock in the future at a fixed price
and a 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. The most
popular method of valuing stock options is the
Black Scholes model.
Apart from call options granted to employees, most stock options are
One of the earliest stock by the Dutch East
During the Roman Republic, the state contracted (leased) out many of
its services to private companies. These government contractors were
called publicani, or societas publicanorum as individual company.
These companies were similar to modern corporations, or joint-stock
companies 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 an 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 at Toulouse, 96 shares of the Société des
Moulins du Bazacle, or
Bazacle Milling Company
Bazacle Milling Company were traded at a value
that depended on the profitability of the mills the society owned.
As early as 1288, the Swedish mining and forestry products company
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 resource was available,
Copper Mountain) in exchange for an estate.
The earliest recognized joint-stock company in modern times was the
English (later British) East
India Company, one of the most famous
joint-stock companies. It was granted an English
Royal Charter by
Elizabeth I on December 31, 1600, with the intention of favouring
trade privileges in India. The
Royal Charter effectively gave the
newly created Honourable
East India Company
East India Company (HEIC) a 15-year monopoly
on all trade in the East Indies. The company transformed from a
commercial trading venture to one that virtually ruled
India as it
acquired auxiliary governmental and military functions, until its
India Company's flag initially had the flag of England, St.
George's Cross, in the corner.
Soon afterwards, in 1602, the
Dutch East India Company
Dutch East India Company issued the
first shares that were made tradeable on the Amsterdam
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
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
The innovation of joint ownership made a great deal of Europe's
economic growth possible following the Middle Ages. The technique of
pooling capital to finance the building of ships, for example, made
Netherlands a maritime superpower. Before 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.
Economic historians[who?] find the Dutch stock market of the 17th
century particularly interesting: there is clear documentation of the
use of stock futures, stock options, short selling, the use of credit
to purchase shares, a speculative bubble that crashed in 1695, and a
change in fashion that unfolded and reverted in time with the market
(in this case it was headdresses instead of hemlines). Edward
Stringham 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.
Stock certificate for ten shares of the Baltimore and Ohio Railroad
Main article: Shareholder
A shareholder (or stockholder) is an individual or company (including
a corporation) that legally owns one or more shares of stock in a
joint stock company. Both private and public traded companies have
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, 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 of
the company. However, shareholder's rights to a company's assets are
subordinate to the rights of the company's creditors.
Shareholders are a one type of stakeholders, which may include anyone
who has a direct or indirect equity interest in the business entity or
someone with even a non-pecuniary interest in a non-profit
organization. Thus it might be common to call volunteer contributors
to an association stakeholders, even though they are not shareholders.
Although directors and officers of a company are bound by fiduciary
duties to act in the best interest of the shareholders, the
shareholders themselves normally do not have such duties towards each
However, in a few unusual cases, some courts have been willing to
imply such a duty between shareholders. For example, in California,
USA, majority shareholders of closely held corporations have a duty
not to destroy the value of the shares held by minority
The largest shareholders (in terms of percentages of companies owned)
are often mutual funds, and, especially, passively managed
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. This process is
called an initial public offering, 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 dividends. The owner may also
inherit debt and even litigation.
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 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
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 and company managers have a
fiduciary 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 [Outside Passive Minority Investor] stockholders.
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. 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 financing. Alternatively, 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 (day-to-day
A stockbroker using multiple screens to stay up to date on 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
The desire of stockholders to trade their shares has led to the
establishment of stock exchanges, organizations which provide
marketplaces for trading shares and other derivatives and financial
products. Today, stock traders are usually represented by a
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. In the United States, through the intermarket trading
system, stocks listed on one exchange can often also be traded on
other participating exchanges, including electronic communication
networks (ECNs), such as
Archipelago or Instinet.
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
American depositary receipt (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
(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 Board (OTCBB) and OTC
Markets Group (formerly known as Pink OTC Markets Inc.) where
individual retail investors are also represented by a brokerage firm
and the quotation service's requirements for a company to be listed
Shares of companies in bankruptcy proceedings are usually
listed by these quotation services after the stock is delisted from an
There are various methods of buying and financing stocks, the most
common being through a 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 or credit union 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 in
which the stock is purchased directly from the company, usually
without the aid of brokers.
When it comes to financing 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, guarantee that the buyer
can repay the loan; otherwise, the stockbroker has the right to sell
the stock (collateral) to repay the borrowed money. He can sell if the
share price drops below the margin requirement, 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 stock is procedurally similar to buying stock. Generally, the
investor wants to buy low and sell high, if not in that order (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 taxes will have to be paid on the additional
proceeds, if any, that are in excess of the cost basis.
Stock price fluctuations
The price of a stock fluctuates fundamentally due to the theory of
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 and 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
American Customer Satisfaction Index (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 scams. stock price are very valuable.
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, 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.
The product of this instantaneous price and the float at any one time
is the market capitalization 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-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 (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)
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 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 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.
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.
Arrangements between railroads
Buying in (securities)
Naked short selling
Stock and flow
Traditional and alternative investments
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^ "Cambridge Advanced Learner's Dictionary". Dictionary.cambridge.org.
Stock vs. Preferred Stock, and
^ Zvi Bodie, Alex Kane, Alan J. Marcus, Investments, 9th Ed.,
^ "Rule 144: Selling Restricted and Control Securities". US Securities
and Exchange Commission. Retrieved 18 May 2013.
Black Scholes Calculator". Tradingtoday.com. Retrieved
^ Livy, Ab Urbe Condita
^ (Cic. pro Rabir. Post. 2; Val. Max. VI.9 §7)
^ (Polybius, 6, 17, 3)
^ (Cicero, P. VAT. 12, 29.)
^ [dead link]
^ Irwin, Douglas A. (December 1991). "Mercantilism as Strategic Trade
Policy: The Anglo-Dutch Rivalry for the East
India Trade". The Journal
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^ Stringham, Edward (2003). "The Extralegal Development of Securities
Trading in Seventeenth Century Amsterdam". The Quarterly Review of
Economics and Finance. SSRN 1676251 . Missing or empty
url= (help); access-date= requires url= (help)
^ The oldest share in the world, issued by the Dutch East India
Company (Vereenigde Oost-Indische Compagnie or VOC), 1606.
^ Stringham, Edward (2002). "The Origin of the London
as a Self Policing Club". Journal of Private Enterprise.
SSRN 1676253 . Missing or empty url= (help);
access-date= requires url= (help)
^ "Devil the Hindmost" by Edward Chancellor.
^ Jones v. H. F. Ahmanson & Co., 1 Cal. 3d)
^ "Jones v. H.F. Ahmanson & Co. (1969) 1 C3d 93". Online.ceb.com.
^ Whitman, 2004, 5
^ Jackson, Thomas (2001). The Logic and Limits of Bankruptcy Law.
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Stock Trading". US
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Stock Prices: Bid, Ask, Spread". Youngmoney.com.
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