Stock

Financial Dictionary -> Investing -> Stock

Stock, sold as shares, is the representative term given to the financial instruments sold on the public stock market in order to raise capital for public companies. A single piece of stock or several shares represent a percentage of ownership in said company and therefore a percentage of future profits. Shares are usually denoted in the form of a stock certificate.

There are several different types of stock, with different benefits. Usually these are common stock or preferred stock.

Common stock is as the name suggests the most common type of stock. This gives the holder the right to vote on corporate decisions and to partake in the annual shareholder's meeting with board members from the company. Common stock holders are not guaranteed a dividend amount each year. On the flip side preferred stock waiver's the shareholder's right to vote in cooperate decisions, however they are guaranteed a minimum amount of dividend payout each year.

Some companies do both types of stock, some only do common stock. Investors with large portfolios, who delegate a lot of the work involved usually seek out preferred stock and do not worry about decisions in the company because profits are all that matters. This can be a self defeating prophecy however, as bad decisions can result in low returns. Common stockholders often like to get involved with the direction of the company. Somebody who holds the majority common stock have the most power in the company.

Companies usually go public on the stock market to raise funds for expansion. Until this point they may have used private investors and shareholders, but now a lot more capital can be injected in to the company as investing is open to anyone. The downside of issuing stock is that the original owners can often lose control, having to answer to the shareholders before doing what they want.