stock is a form of security that indicates the holder has proportionate
ownership in the issuing corporation.
Corporations issue (sell) stock to raise funds to operate their
businesses. There are two main types of stock: common and
preferred.
Stocks are bought and sold predominantly on stock exchanges,
though there can be private sales as well, and they are the foundation
of nearly every portfolio.
Understanding Stocks
Corporations issue (sell) stock to raise funds to operate their
businesses. The holder of stock (a shareholder) has now bought a
piece of the corporation and, depending on the type of shares held,
may have a claim to a part of its assets and earnings. In other words,
a shareholder is now an owner of the issuing company. Ownership is
determined by the number of shares a person owns relative to the
number of outstanding shares. For example, if a company has 1,000
shares of stock outstanding and one person owns 100 shares, that
person would own and have claim to 10% of the company’s assets
and earnings.
Stock holders do not own corporations; they own shares issued by
corporations. But corporations are a special type of organization
because the law treats them as legal persons. In other words,
corporations file taxes, can borrow, can own property, can be sued,
etc. The idea that a corporation is a “person” means that the
corporation owns its own assets. A corporate office full of chairs and
tables belongs to the corporation, and not to the shareholders.
This distinction is important because corporate property is legally
the liability of both the corporation and the shareholder. If the
corporation goes bankrupt, a judge may order all of its assets sold –
but your personal assets are not at risk. The court cannot even force
you to sell your shares, although the value of your shares will have
fallen drastically. Likewise, if a major shareholder goes bankrupt, she
cannot sell the company’s assets to pay off her creditors.
Common vs. Preferred Stock
There are two main types of stock: common and preferred. Common
stock usually entitles the owner to vote at shareholders’ meetings and
to receive any dividends paid out by the corporation. Preferred
stockholders generally do not have voting rights, though they have a
higher claim on assets and earnings than the common stockholders.
For example, owners of preferred stock (such as Larry Page)
receive dividends before common shareholders and have priority in
the event that a company goes bankrupt and is liquidated.