Stock
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Stocks (also capital stock, or sometimes interchangeably, shares) consist of all the shares[a] by which ownership of a corporation or company is divided.[1] A single share of the stock means fractional ownership of the corporation in proportion to the total number of shares. This typically entitles the shareholder (stockholder) to that fraction of the company's earnings, proceeds from liquidation of assets (after discharge of all senior claims such as secured and unsecured debt),[3] or voting power, often dividing these up in proportion to the amount of money each stockholder has invested. Not all stock is necessarily equal, as certain classes of stock may be issued, for example, without voting rights, with enhanced voting rights, or with a certain priority to receive profits or liquidation proceeds before or after other classes of shareholders.
Stock can be bought and sold privately or on
Stock bought and sold in private markets fall within the private equity realm of finance.
A person who owns a percentage of the stock has the ownership of the corporation proportional to their share. The shares form a 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. Ownership of 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
Types
Stock typically takes the form of shares of either
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.[7] 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 are met.
Stock derivatives
A 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
History
During the
Around 1250 in France at Toulouse, 100 shares of the Société des Moulins du Bazacle, or Bazacle Milling Company were traded at a value that depended on the profitability of the mills the society owned.[14]
In 1288, the Bishop of Västerås acquired a 12.5% interest in Great Copper Mountain (Stora Kopparberget in Swedish) which contained the
The earliest recognized joint-stock company in modern times was the English (later British)
Soon afterwards, in 1602,
A shareholder (or stockholder) is an
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 one type of
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 other.
However, in a few unusual cases, some courts have been willing to imply such a duty between shareholders. For example, in
The largest shareholders (in terms of percentages of companies owned) are often mutual funds, and, especially, passively managed exchange-traded funds.
Application
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
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 company.
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,
- ...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.[20]
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).[21]
Means of financing
Financing a company through the sale of stock in a company is known as
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 traded entity.
The desire of stockholders to trade their shares has led to the establishment of
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 (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
Buying
There are various methods of buying and
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
Selling
Selling stock is procedurally similar to buying stock. Generally, the investor wants to buy low and sell high, if not in that order (
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.
Short selling
Short selling consists of an investor immediately selling borrowed shares and then buying them back when their price has gone down (called "covering").[23] Essentially, such an investor bets[23] that the price of the shares will drop so that they can be bought back at the lower price and thus returned to the lender at a profit.
Risks of short selling
The risks of short selling stock are usually higher than those of buying stock. This is because the loss can theoretically be unlimited since the stock's value can theoretically go up indefinitely.[23]
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 by the American Customer Satisfaction Index (ACSI), is significantly correlated to the market value of a stock.[24] 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 .
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 are not enough buyers, the price will go down.[b]
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
The EMH model, if true, has at least two interesting consequences. First, because financial
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
Arbitrage trading
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.[26]
See also
- Arrangements between railroads
- Boiler room
- Bucket shop
- Buying in (securities)
- Concentrated stock
- Employee stock ownership
- Equity investment
- GICS
- Golden share
- House stock
- Insider trading
- Money managers
- Naked short selling
- Penny stock
- Scripophily
- Social ownership
- Stock and flow
- Stock dilution
- Stock valuation
- Stock token
- Stub (stock)
- Tracking stock
- Treasury stock
- Traditional and alternative investments
- Voting interest
Notes
References
- ^ OCLC 954137383.
stock - especially AmE one of the shares into which ownership of a company is divided, or these shares considered together"
"When a company issues shares or stocks especially AmE, it makes them available for people to buy for the first time. - ^ stock Archived 30 April 2021 at the Wayback Machine in Collins English Dictionary: "A stock is one of the parts or shares that the value of a company is divided into, that people can buy."
- ^ "stock". Investopedia. Archived from the original on 25 December 2018. Retrieved 25 February 2012.
- ^ "stock". Cambridge Advanced Learner's Dictionary. Archived from the original on 26 August 2009. Retrieved 12 February 2010.
- ^ "Common Stock vs. Preferred Stock, and Stock Classes". InvestorGuide.com. Archived from the original on 6 January 2019. Retrieved 10 June 2007.
- ISBN 978-0-07-803469-5.
- ^ "Rule 144: Selling Restricted and Control Securities". US Securities and Exchange Commission. Archived from the original on 9 March 2017. Retrieved 18 May 2013.
- ^ "Black Scholes Calculator". Tradingtoday.com. Archived from the original on 14 April 2010. Retrieved 12 February 2010.
- Ab Urbe Condita
- ^ (Cic. pro Rabir. Post. 2; Val. Max. VI.9 §7)
- ^ (Polybius, 6, 17, 3)
- ISBN 978-90-04-30622-6. Archivedfrom the original on 10 February 2023. Retrieved 8 February 2023.
- ^ (Cicero, P. VAT. 12, 29.)
- ^ "Paris: It Started with the Lyons Bourse | NYSE Euronext". Archived from the original on 13 September 2012. Retrieved 18 December 2009.
- ^ International Council on Monuments and Sites (ICOMOS) (2000), Mining Area of the Great Copper Mountain in Falun – Advisory Body Evaluation (PDF), United Nations Educational, Scientific and Cultural Organization, archived from the original (PDF) on 12 June 2004
- (PDF) from the original on 31 July 2020. Retrieved 31 July 2019. at 1299.
- SSRN 1676251.
- ^ Jones v. H. F. Ahmanson & Co., 1 Cal. 3d)
- ^ "Jones v. H.F. Ahmanson & Co. (1969) 1 C3d 93". Online.ceb.com. Archived from the original on 10 May 2008. Retrieved 12 February 2010.
- ^ Whitman, 2004, 5
- ISBN 1-58798-114-9.
- ^ "Stock Trading". US Securities and Exchange Commission. Archived from the original on 16 July 2012. Retrieved 18 May 2013.
- ^ a b c "How an Investor Can Make Money Short Selling Stocks". Investopedia. Archived from the original on 30 November 2020. Retrieved 14 February 2023.
- ^ Mithas, Sunil (January 2006). "Increased Customer Satisfaction Increases Stock Price". Research@Smith. University of Maryland. Archived from the original on 17 March 2012. Retrieved 25 February 2012.
- ^ "Understanding Stock Prices: Bid, Ask, Spread". Youngmoney.com. Archived from the original on 7 September 2008. Retrieved 12 February 2010.
- ^ "Arbitrage: How Arbitraging Works in Investing, with Examples". Archived from the original on 24 December 2021. Retrieved 26 November 2022.
Further reading
- ISBN 0-06-055566-1.
- Graham, B.; LCCN 34023635.
- ISBN 0-446-67745-0
- ISBN 978-1-508-52435-9.
- ISBN 978-0-470-10210-7.
- ISBN 978-0-470-82441-2.
- LCCN 98046515.
- LCCN 87004745.
- LCCN 95051449.