What is Stock?

What is Stock?
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Stock in a public corporation represents a share in its ownership. Investors buy and sell stock shares through stock exchanges – public markets highly regulated in the U.S. by the U.S. Security Exchange Commission (SEC) – or "over the counter," a less regulated market of specialist dealers that communicate through electronic networks.

How Do You Buy Stock?

If you want to invest in the stock market, you usually begin by opening an account with a brokerage such as Charles Schwab®, Interactive Brokers® or TD Ameritrade. You can then buy and sell shares of thousands of public companies, some as large as Apple, (stock symbol AAPL), others as small as a newly listed "pink sheet" stock with no discernible assets beyond its corporate listing.

When you buy exchange-traded stock or the stocks of the largest companies traded on the NASDAQ exchange, you have certain legally guaranteed ownership rights that are numerous and sometimes complex, but among the most important are:

  • Equitable ownership. If the company issues 1,000 shares of stock and you own 10 of them, you have a 1 percent ownership share of the company.
  • Voting rights. The company's bylaws describe these rights in detail, but, briefly, you must be notified of shareholder meetings where you have a right to vote your shares for or against any proposal, in proportion to your ownership.
  • Market access. Through an exchange or a dealership network, you can buy or sell these shares as you choose. 

Common Shares vs. Preferred Shares

The two kinds of stock shares most companies offer are common stock and preferred stock. Common stock gives shareholders ownership rights and the right to share in the company's profits, either through the increase in value of its shares over time (the average increase in the value of common stock on major exchanges is approximately 10 percent each year) or through the issuance of dividends. Not all corporations issue dividends; however, if they do, the dividend amount is decided by the corporation's board of directors. By law, all owners of common stock receive the same dividend amount per share.

Preferred stock, which is traded separately from common stock, gives owners different rights. Preferred stock generally does not give owners the right to vote. On the other hand, preferred stockholders have other rights that preempt the rights of common shareholders.

While common shareholders receive dividends only if the company's board of directors decides to issue them, preferred stockholders have fixed dividend payments that must be issued unless the corporation's financial difficulties preclude issuance.

If the corporation's fortunes turn upward, preferred stockholder dividends are paid in arrears. On the other hand, if the corporation becomes insolvent, any remaining assets are distributed to the preferred shareholders ahead of the common shareholders. In most corporate dissolutions, the common stockholders get little or nothing.

What Is Shareholders' Equity?

When you buy stock, you're buying a share of the corporation's equity, or net worth, which is the value of its assets less its liabilities.

You can find that value on the corporate balance sheet included in the corporation's 10-K report, which by law must be reported annually to the SEC and made available to the public. But there's a lot of data available online every day that lets you know how your company is doing.

In fact, your stockbroker's home page gives you a lot of information, beginning most fundamentally with the direction of the stock price, up or down. Another quick indicator that you'll find online whenever you look up a stock is sales volume. Steadily increasing sales volume over time is generally a good sign. Shrinking volume is not. Another indicator is the ratio of a stock's sell orders to its buy orders. If sell orders substantially exceed buy orders, it indicates declining investor confidence in the corporation.

How's the Market Doing Today?

You can see how the market's doing any day by going to your broker's homepage. At the bottom, you'll probably see the current value of major indices like the S&P 500 and the Dow Jones Industrial Average (DJIA). You can also do an online search for financial websites like CNN Money that provide this information.

While it's important to keep informed about your investments, it's also a good idea to do so from a little distance. Checking into the market several times a day probably increases your anxiety level more than it helps your stock account. Successful investors (as opposed to short-term traders) pay more attention to long-term trends than the hourly gyrations of individual stocks. A proven stock market investment strategy, in fact, is to buy widely diversified investments and then to hold them for a long time. Warren Buffet, one of the most successful investors of all time, noted at a meeting of Berkshire Hathaway stockholders that he'd advised his wife in the event of his death simply to invest in a broad index fund that represented the entire stock market and then to hold it "for a very long time."