|
|
What is a stock
Buying and selling shares of stock is at the root of American
capitalism, the mechanism by which great companies have been built ever
since the New York Stock Exchange was created way back in 1789. But
what's truly great about the American stock market is that anyone, not
just the rich and privileged, can participate.
Let's start at the beginning. A stock isn't some abstract concept. A
stock represents a single share of ownership in a company. When you own
a stock, you're actually a part owner of a corporation, with all the
rights and responsibilities that come along with that. As a shareholder,
you have a say in how the company operates - though if the company has
issued millions or even billions of shares, your 10 or 100 shares might
not make you the most influential shareholder!
Companies issue stock in the first place so that they can raise capital
to run their business. A corporation sells off shares to outside
investors in organized fashion in a public offering; the first of which
is its initial public offering (or IPO).
The company can issue common stock or preferred stock.
Common stock represents a simple share of ownership; if the company were
to go bankrupt, it would have no financial liability to common
shareholders, so those shares would likely become worthless.
Preferred shares, on the other hand, get some special perks, which might
include higher dividends or a larger vote in running the company.
Preferred shares aren't as common as common stock, so you might never
own preferred stock in your portfolio.
Shares of stock are traditionally represented by a piece of paper - a
stock certificate. Increasingly, though, shares of stock trade hands
electronically, so if you invest with a brokerage firm like ShareBuilder
you may never actually see a physical certificate for the shares that
you own.
The brokerage holds the shares on your behalf in what is known as in
street name, which is nothing more than a method of bookkeeping and has
no affect whatsoever on your ownership of the stock. It does take away
the pleasure of holding onto a beautifully engraved piece of paper that
represents your ownership in a company, but owning shares in street name
is much more efficient and convenient, especially when it comes time to
sell.
When you invest in a public offering, you buy shares directly from the
company (with the hope that the company will become even more
successful, thus causing the price of its shares to increase). After the
company's IPO, investors are free to sell their shares, and to buy more,
but not from the company directly. Instead, shares are traded on
organized stock markets like the New York Stock Exchange and Nasdaq. The
company itself receives no cash for shares that are sold in these
secondary markets, but it's not that they don't care. Every corporation
wants to see its stock price increase for the benefit of shareholders.
Stocks serve an important purpose in American business, but they might
be even more important to you personally. Stocks can be a great vehicle
for building personal wealth, so don't be shy about turning into a
full-blown capitalist.
|
|