Stock Basics

What is a stock?

A stock is defined as owning a share of a particular company. In general, stocks represent a claim in the assets, earnings and voting rights of the company. Acquiring more number of stocks mean a greater ownership in the company. Stocks are also represented as shares or equity among the investors.

Stocks don’t support and guarantee a fixed return on investment. Stock investments involve higher risks for an investor. But return on investment for stocks are of two kinds:

  • Capital gain – If the stock price is higher than the purchase price, then it elucidates that investment has grown.
  • Dividend – The company pays out cash to stockholders from its profits as a fixed amount per stock owned.

The most important feature of a stock is its limited liability i.e. if the company is not in a position to pay off its debts; stockholders are not personally liable for the same. Market trend, company news and investor opinions will affect stock price overall. There are two types of market namely:

  • Bull market represents usually rise in stock prices, high economic growth and strong investor confidence
  • Bear market represents usually decline in stock prices, low economic growth and low investor confidence

Why does a company issue stock?

At some point of time, every company has to raise money to run business in the market place. The private company will announce the first sale of a stock known as ‘Initial Public Offering (IPO)’ in order to generate money by selling part of a company in the form of a share, stock or equity. This is also referred to as ‘Equity Financing’. Thus, publicly traded companies are required to report quarterly on their financial status and earnings to all the investors of the company.

Finally, a company's stock price depends on what investors think about the stock, not necessarily what the company is really "worth” off.