60 Second Stock Lesson
In financial terminology, stock is the capital raised by a corporation, through the issuance and sale of shares. A shareholder is any person or organization which owns one or more shares of a corporation's stock.
The first company that issued shares was the Dutch East India Company in the early 17th century (1602).
The innovation of joint ownership made a great deal of Europe's economic growth possible following the middle ages. The technique of pooling capital to finance the building of ships, for example, made the Netherlands a maritime superpower. Before the widespread adoption of the joint-stock corporation, an expensive venture such as building a merchant ship could only be undertaken by governments or by very wealthy individuals or families.
The owners of a 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.
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 dividends.
In the common case, where there are thousands of shareholders, it is impractical to have all of them making the daily decisions required in the running of a company. Thus, the shareholders will use their shares as votes in the election of members of the board of directors of the company.
Each share constitutes one vote (except in a co-operative society where every member gets one vote regardless of the number of shares they hold). 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 owning 51% of shares does mean that you own 51% of the company, it does not give you 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, including the United States, boards of directors and company managers have a fiduciary responsibility to run the company in the interests of its stockholders.
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 elect 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 and 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 (most often the shareholders end up with nothing).
Types of shares
There are several types of shares, including common stock, preferred stock, treasury stock, and dual class shares. Preferred stock, sometimes called preference shares, have priority over common stock in the distribution of dividends and assets, and sometime have enhanced voting rights such as the ability to veto mergers or acquisitions or the right of first refusal when new shares are issued (i.e. the holder of the preferred stock can buy as much as they want before the stock is offered to others). A dual class equity structure has several classes of shares (for example Class A, Class B, and Class C) each with its own advantages and disadvantages. Treasury stock are shares that have been bought back from the public. Treasury Stock is considered issued but not outstanding.
Now that you know the basics, do some homework and make some money!