What is a Stock?
A stock is a form of security that represents partial ownership of a company. Stock ownership entitles the stockholder to a proportion of the corporation's assets and the profits it makes in the future.
The entitlement of a stockholder on the company assets and share of profits depend on how much of the company stock they own.
Units of stock are interchangeably called 'shares.'
Why do companies sell stock?
To put it in simply- "To raise a lot of Cash"
Selling privately held stock to the public is done through an Initial Public Offering or an IPO (also called 'going public') and allows the owners of a private company access to substantially more capital than they can get through private shareholders or venture capitalists.
With access to so much new capital, the private owners of the company get a big payout, as well as the company, gets access to an entire world of expansion and investment opportunities not available to it before.
Where can you buy stock?
Companies can be privately owned by stockholders (like your local mom and pops retail stores) or openly traded in stock markets (like McDonald's and Microsoft) where the stock of the company can be bought by members of the public. Publicly traded stocks are bought and sold in Stock Exchanges through Brokerages though there can be private sales as well.
How do you make money in Stocks?
In general, there are two ways in which investors make their money back in Stocks. They are Capital Appreciation or Dividends.
If your bet on the correct stocks and they do well, the value of your shares will increase.
You can then sell these shares at a higher price to someone else in the market locking in your profits.
So, for example, you could buy a share at $200 and it could go to $300 in one year.
When you sell your share at $300, you've just made a profit of $100 on the share.
A whopping 50% return on your initial investment.
Another way to make money with the shares through earning Dividends.
The concept of dividends works something like this.
If the company you have invested in does very well and makes a big profit- it may decide to either keep the money and reinvest it in other profitable projects OR it may decide to give some of these profits back to its shareholders. Any money given back to the shareholders from company profits is called a Dividend.
As a rule of thumb, dividends are more likely to be paid by well-established companies that no longer need to reinvest as much money back into their business. High-growth, tech or biotech companies rarely pay dividends, because they need to reinvest profits into expanding that growth.
For example, If a company makes one million dollars in profit for the year, it may decide to give 25% or 250,000 as dividend payment to all its shareholders.
Now, the more of the company, you own, the bigger your cash out.
What are the different types of Stock?
Owning a stock not only gives you a chance to make money but also comes with a few other benefits.
Since you are now part-owner of a corporation, no matter how small your percentage of ownership might be, you now have what is called Voting Rights.
Voting rights allow you to vote and also attend company shareholder meetings thereby allowing you to exert at least some influence on the companies decision-making process.
Most companies have a fairly straightforward voting system.
One Share = One Vote.
But with most publicly traded companies having millions and millions of shares outstanding at any given point in time, you may not be able to change much with your vote.
Theoretically though, with enough money, you could buy enough of the shares to become the biggest shareholder and if you manage to pull that off, the bigger your impact on company decisions is gonna be.
But, let me put things in context for you here.
In reality, companies trading in a public stock market have millions of shares.
Take Apple, for example.
Apple has 4,829,926,000 (4 Billion, eight hundred and twenty-nine million, nine hundred and twenty-six thousand) shares outstanding. So, if you own 10 shares, you'll own just 0.0000002% of the company.
Nike, for example, has 1.6 Billion shares outstanding and owning one Nike share will give you just 0.00000006% of the company.
While you could theoretically take control of a company, practically, the same is not possible for most of us in our lifetimes.
There are Individuals and Groups called Activist Investors that actively seek to purchase a large number of shares in a public company with the objective of gaining control of the company.
Activist investors have their own agendas that vary in nature and may not always be aligned with the shareholder's best interests. You can read more about Activist Investors and their modus operandi by clicking here.
Common Vs. Preferred Shares
The world of stocks is divided into Common Stock and Preferred Stock.
Common shares have voting rights and preferred shares don't.
Preferred shares are called that because they get preference when a company pays a dividend which is basically a split of the profit of the company with the shareholder.
Stocks may also be categorized based on
- Company size (Small-Cap, Mid, and Large-Cap)
- Industry (Health Care, Utilities, Technology, Real Estate, etc)
- Geographic location (From Developed Markets, Developing Markets, etc)
- Style (Growth, Value)
The content provided on accountingsuperpowers.com and accompanying courses is intended for educational and informational purposes only to help business owners understand general accounting issues. The content is not intended as advice for a specific accounting situation or as a substitute for professional advice from a licensed CPA. Accounting practices, tax laws, and regulations vary from jurisdiction to jurisdiction, so speak with a local accounting professional regarding your business. Reliance on any information provided on this site or courses is solely at your own risk.
Tax and accounting rules and information change regularly. Therefore, the information available via this website and courses should not be considered current, complete or exhaustive, nor should you rely on such information for a particular course of conduct for an accounting or tax scenario. While the concepts discussed herein are intended to help business owners understand general accounting concepts, always speak with a CPA regarding your particular financial situation. The answer to certain tax and accounting issues is often highly dependent on the fact situation presented and your overall financial status.