How Do Stocks Work?

A corporation, whether privately held or publicly traded, is owned by its stockholders. Each share of stock represents a percentage of ownership. A stock certificate indicates how many shares were purchased and how big a piece of the company is owned.

If Street Scooters Inc. has sold 10 shares of stock, each share to a different individual, it would mean there were 10 stockholders, each owning one-tenth of the company. If Street Scooters sold 100 shares of stock, each share to a different individual, there would be 100 stockholders. Each would own one onehundredth of the company.

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The “stock market” is in more than one location. It is made up of a collection of exchanges around the world where stocks are traded. The New York Stock is the most well known in the United States. In recent years it has expanded to become NYSE Euronext, having added a number of European exchanges and the American Stock Exchange (Amex). The electronic exchange that is home to many new and high-technology stocks is the NASDAQ it is joined with regional exchanges. Overseas, the London, Tokyo, and Hong Kong exchanges are the most recognized. Stocks may be traded on multiple exchanges, but the companies must meet the criteria for each.

Public corporations sell their stock to the general public to raise capital. They use the capital to expand the company or pay off debts. Typically, a corporation sells its stock to an investment banker, who pays an agreed upon price and then handles the marketing and sales to get the stock into the public markets. A public corporation receives the proceeds from the sale before the offering. Once the stock is sold, however, the corporation no longer has control over it. It is traded in the secondary market. The stock can be bought or sold by anyone. Such trading activity occurs continually on the stock market between brokers. A stockbroker has a license that confers the right to make trades for customers.

Stocks may be either preferred or common, with preferred stock having aspects of debt and common stocks being true equity. Preferred stock typically has a fixed dividend that is paid quarterly and takes precedence over common stock in the case of liquidation. Many companies do not issue preferred stock. Common stock represents the true ownership of a company. It is the type of stock that is most often held and can be made available in different classes that define whether it comes with voting rights. In case the business is liquidated, common stockholders get repaid after all debt holders and preferred stockholders.

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The price of a stock at any given moment reflects investors’ opinions about how well that business is going to perform. If the company does well or its investors expect it to do well, the price of the stock is likely to rise. Investors make their returns by selling stock at a higher price than the one at which they bought it. They also may earn dividends, which are the portion of a corporation’s earnings distributed to shareholders, typically on a quarterly basis. Dividends are paid at the discretion of a company’s board of directors.

The daily record of trading activity appears in tables published in The Wall Street Journal and in the business sections of many other publications. They are also available online from numerous services. These tables allow investors to track the changing value of their investments. Information about stocks is available through brokerage firms and services, such as ValueLine and Morningstar.

Let’s say you own 10 shares of a stock you bought at $10 per share (for a total of $100). You see in the stock table that the price per share has declined to $8.50 that day. Your $100 investment is now worth only $85 (10 shares × $8.50/share = $85). You have three choices:

1. Sell the shares before their value declines further.
2. Keep them, hoping the decline is temporary and the price will go back up.
3. Buy more shares at the lower price to increase your profit when the price does go back up.

The London School of Business and Finance is the best source to learn more about stock market.

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