November 14, 2017

Stock

What is Stock (Share)?

Representation of a share in the ownership of a company that is available for trading on the financial markets.

In a classic definition of terms, a share is a security that certifies your interest in the company’s business.

This is an equity security that fixes the rights of the owner (shareholder) for receiving of part of the profit of the company in the form of dividends, for participation in the management of the stock company and for the part of the property remaining after its liquidation.

Acquiring a share of some company, you become a co-owner of the company.

And subject to the successful conduct of affairs, you as a shareholder can count on a part of its profits in proportion to the number of shares.

That means that you will receive dividends.

Buying Stocks means you becoming a Stock Owner

At that, the key to understand the work with the shares is that you are a co-owner, shareholder of the company, not its creditor, and therefore you, with your capital, bear all of the risks inherent to the status of a co-owner.

If the company is not successful, it will not only be unable to pay dividends to you, but there is a risk that the value of shares can go down.

Shares are issued for an indefinite period, without obligation to repurchase and without any obligations of bound dividend payments.

The main reasons for buying shares are the following:

  • Owning shares of the company, you can receive dividends which are part of the company’s revenue. These dividends are your income on your capital invested in the shares of this company.
  • If the company whose shares you own, is promising, in demand and respected by investors, the price of its shares increases, which increases your initial investment.
  • You are not responsible for the obligations of the company, and if it goes bankrupt, then maximum you can lose is the amount invested in the shares of this company.
  • Over the last century shares provided the biggest income to investors in comparison with alternative similar financial instruments (bonds, deposits, etc.).
  • Risk of investments in case of proper investing in shares is successfully offset by the chance of getting very high profit. A good example of this is “Microsoft”. Ten thousand dollars invested in the shares of “Microsoft” at market entry have turned into millions.

What types of shares exist?

Depending on the dividend policy and the management of the company, shares are divided into:

1. Ordinary shares

The owner of such shares is entitled to participate in the management of a joint stock company (1 share corresponds to 1 vote at the shareholders’ meeting).

The holders of ordinary shares receive dividends, the source of payment of which is the net profit of the company.

The Board of Directors establishes the amount of dividends; the shareholders` meeting can only reduce its value.

The shareholders are the real owners of the company; they undertake all risks connected with the activity of the company.

Such shares do not provide fixed dividends and the amount usually depends on the profit of the joint stock company;

2. Preference shares

They can both restrict the rights of a shareholder in the company’s management, and provide additional rights to manage it.

Often preferred stocks bring fixed dividends.

On preferred shares fixed dividends can be paid, also distribution of profit balance is possible.

This type of stock is called equity participation.

Depending on the form of registration, shares are divided into:

3. Cash (documentary) shares

Cash (documentary) shares, which are prettily designed and you can hold them in your hands.

Such shares are printed by special licensed organizations, such securities contain special characters of protection against forgery.

4. Uncertificated shares

Uncertificated shares in recent decades have become widespread due to the level of development of Internet technologies, e-commerce technology and accounting.

With uncertificated shares it is easier to conduct transactions electronically, they are easier to control than paper shares.

Evidence of the ownership of such a security is an entry in the register of the company that issued the shares.

By type of registration, the shares are divided into:

5. Nominal shares

Nominal shares, with indication of the information about the owner.

The owner of the shares is registered in the documents of the issuing company and all transactions with securities may only be made upon notice of the joint stock company.

Nominal shares are usually of high value.

6. Bearer shares

Bearer shares are not assigned to a specific owner.

They are issued in relatively low values and are anonymous.

Due to free circulation bearer shares are similar to money.

Purchase and sale of these securities mean change of the owner.

By type of a joint-stock company shares are divided into:

7. Shares of open joint-stock companies

Shares of open joint-stock companies, which are freely bought and sold on the market.

They can be sold to another person, without notification of the joint-stock company

Where to buy and sell shares?

In terms of financial markets, the main place where majority of the shares of world`s manufacturers of goods and services is traded, is the so-called stock market (Stock Exchange).

Stock exchanges bring together buyers and sellers of shares, which agree on the price and perform purchase and sale transactions.

Part of the stock exchanges are physical locations where transactions are made by real people.

You can often see on TV trading venues of stock exchanges, where people in multi-coloured jackets with badges stand very close to each other in some area, wave their hands, shout and signal to each other.

That is how the process of trading shares goes, with the participation of professional experts.

Another part of the stock exchanges is virtual, where exchanges are made up of multiple computers and protected networks through which trades are made electronically.

The main objective of the stock exchange is to provide an opportunity for buyers and sellers to exchange securities, while reducing investment risk.

For shares, as well as for other securities, there exist two markets: Primary and Secondary.

Primary market is a market in which the securities are issued by a company for the first time, which is called the initial public offering (IPO).

Secondary market is a market in which investors buy and sell shares that have already been issued by companies and have no direct relation to them.

It is important to understand that the primary market investors buy shares directly from companies, and in the secondary market investors trade shares among themselves, without direct interference of the companies.

Almost every country has its stock exchange where shares of local companies are traded.

But there are stock exchanges, which have in their lists shares of companies from all over the world.

These stock exchanges include global giants:

  • New York Stock Exchange, which has existed for over 200 years and is a home for the shares of such companies as “Coca-Cola” and “McDonald’s»;
  • Electronic stock exchange NASDAQ trades shares of such companies as «Microsoft», «Dell» and «Intel»;
  • The London Stock Exchange is the largest stock exchange in Europe and brings together thousands of various European companies;
  • The Hong Kong Stock Exchange is the largest in the Asian region.

The major securities on the stock exchanges are shares and ETF funds.

In addition, transactions with the use of other financial instruments are often performed in the stock exchange.

So is trading in options – the right to buy or sell shares in the future at a certain price.

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