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In
financial markets, stock
is the capital raised by
a corporation through
the issuance and
distribution of shares.
A person or organization
which holds share of
stocks is called a
shareholder. The
aggregate value of a
corporation's issued
shares is its market
capitalization. |
There
are several types of
stock:
Common stock
Common stock, also
referred to as common
shares or ordinary
shares, are, as the name
implies, the most usual
and commonly held form
of stock in a
corporation.
Shareholders of common
stock have voting rights
in corporate decision
matters.
Preferred stock
Preferred stock,
sometimes called
preference shares, have
priority over common
stock in the
distribution of
dividends and assets.
Most preferred shares
provide no voting rights
in corporate decision
matters. However, some
preferred shares have
special voting rights to
approve certain
extraordinary events
(such as the issuance of
new shares, or the
approval of the
acquisition of the
company), or to elect
directors.
Dual class stock
Dual class stock is
shares issued for a
single company with
varying classes
indicating different
rights on voting and
dividend payments. Each
kind of shares has its
own class of
shareholders entitling
different rights.
Treasury stock
Treasury stock is shares
that have been bought
back from the public.
Treasury Stock is
considered issued, but
not outstanding.
Stock Derivatives
A stock derivative is
any financial claim
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 futures.
Stock
futures are contracts
where the buyer, or
long, takes on the
obligation to buy on the
contract maturity date,
and the seller, or short
takes on the obligation
to sell. Stock index
futures are generally
not delivered in the
usual manner, but 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
transferable.
Application
The owners of a 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.
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.
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
(except in a
co-operative society
where every member gets
one vote regardless of
the number of shares he
holds). 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
51% of shares does
result in 51% 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.
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 elect 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 and 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 (most often
the shareholders end up
with nothing).
Trading
A stock exchange is an
organization that
provides a marketplace
(either physical or
virtual) for trading
shares, where investors
(represented by stock
brokers) may buy and
sell shares in a wide
range of companies. A
given company will
usually list its shares
by meeting and
maintaining the listing
requirements of a
particular stock
exchange. Many large
companies choose to list
on a U.S. exchange as
well in order to broaden
their investor base.
These shares are called
American Depository
Receipts (ADRs)".
Large
U.S. companies also list
in foreign exchanges for
the same reason.
Although it makes sense
for some companies to
raise capital by
offering stock on more
than one exchange, in
today's era of
electronic trading,
there is limited
opportunity for private
investors to make profit
on pricing discrepancies
between one stock
exchange and another. As
such, arbitrage
opportunities disappear
quickly due to the
efficient nature of the
market.
Buying
There are various
methods of buying and
financing stocks. The
most common means is
through a stock broker.
Whether they are a full
service or discount
broker, they 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 stock
brokers 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 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.
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 buyers
ownership, or by buying
stock on margin. Buying
stock on margin means
buying stock with money
borrowed against the
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 the car or house
as collateral. Moreover,
borrowing is not free;
the broker usually
charges 10-20% 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);
although a number of
reasons may induce an
investor to sell at a
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, discount
or full service, 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 Fluctuation
The price of a stock
fluctuates fundamentally
due to the law of supply
and demand. Like all
commodities in the
market, the price of a
stock is directly
proportional to the
demand. However, there
are many factors on
basis of which the
demand for a particular
stock may increase or
decrease. These factors
are studied using
methods of fundamental
analysis and technical
analysis to predict the
changes in the stock
price.
Technology's Influence
on Trading
Stock trading has
evolved tremendously.
Since the very first
Initial Public Offering
(IPO) in the 13th
century, owning shares of
a company has been a
very attractive
incentive. Even though
the origins of stock
trading go back to the
13th century, the market
as we know it today did
not catch on strongly
until the late 1800s.
Co-production between
technology and society
has led the push for
effective and efficient
ways of trading.
Technology has allowed
the stock market to grow
tremendously, and
society has encouraged
the growth. Within
seconds of an order for
a stock, the transaction
can now take place. Most
recent advancements with
trading have been due to
the Internet. The
Internet has allowed
online trading. In
contrast to the past
where only those who
could afford expensive
stockbrokers, anyone who
wishes to be active in
the stock market can now
do so at a very low cost
per transaction. Trading
can even be done through
Computer-Mediated
Communication (CMC) use
of mobile devices such
as handheld computers
and cellular phones.
These advances in
technology have made day
trading possible.
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