You read about it everyday on the papers, it’s flooding the pages on Finance and Business. Yes, it is none other than the term stocks. Many seems to be reading the page just to find out how share prices are progressing, but how many actually understood this simple yet enigmatic term? Many don’t, in fact, they have no idea how it works either. Today, I am going to introduce you guys to the fundamentals of stocks with some reference to www.wikipedia.org (Best Website ever).
In the investment world, a share of stock (also referred to as equity share) represents a share of ownership in a corporation (company).
-www.listphile.com
This means that if you have a stock, or you buy one, you literally own a share of the company. Let’s take reference to Berkshire Hathaway, yes the renowned company owned by Warren Buffett. The thing about Warren Buffett is that he can express his ideas clearly through words, and that is why people invest in his company, to get the annual reports he writes. In fact, he collates the annual reports from other companies, analyze it and republish it in a simple and lucid format. Different people have different needs for stocks, but most are after short-term profits I would say.
There are 3 common types of stocks, namely the common stock, preferred stock and convertible preferred stock.
To put it across in layman terms, common stocks allow you to vote during corporate decisions, as you are part of the committee.
Preferred stocks do not give you the right to vote in the company but it allows you to get your share of profits first, even before any other shareholders, this one is popular among people who invest for short returns. They are not interested in the voting rights; rather they want to be the first in time whenever money starts rolling in!
Lastly, convertible preferred stock, this is very much synonymous with preferred stocks. The difference is that you have the option to convert your preferred stocks into common stocks; the decision is entirely up to you. Let’s say midway, you decide that you are holding a large amount of shares now and that you want to participate in the voting rights in the company, you can easily change your stocks over to gain that right.
Stock Options
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.
Selling of stocks to the public
This is extremely common, known as initial public offering, IPO, which I’m sure is now familiar to you, considering the fact that this term is so prominent on the papers today. Whenever, a company needs to acquire or conduct mass purchases, they do not have sufficient funds, even after trading collaterals with companies, meaning that they used a part of their company as a guarantee to the bank to get some loans. Therefore, they try to raise money using this other means, to offer shares. At this point in time, the public will start to purchase the shares and they naturally own a part of the company, depending on the number of shares possessed.
Then you might wonder, doesn’t this mean that everyone, up to a few thousands, can actually vote in corporate decisions? The answer is a no. Corporations usually tend to issue various types of classes of shares, which in turn have different voting rights. In the case of small decisions, it is usually conducted within the company per se. Nonetheless, the public are usually entitled to vote for the selection of the Chief Executive Officer or the board of directors. Even so, effective control still lies within the hands of the majority shareholder who tends to out-vote the minor shareholders, i.e. the public.
Well, by now, I hope you have a rough idea about stocks, so from now on, when you read the papers, you can read it with a different perspective, a greater understanding of what it says. Take care!
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