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A stock is a type of security that represents a share of ownership in a company and is a foundational concept in finance. When individuals purchase stocks, they are buying shares (small portions of a company’s equity), which entitles them to a claim on part of the company’s assets and earnings.
Stocks are traded on public exchanges like the New York Stock Exchange (NYSE) or NASDAQ, where prices fluctuate based on supply and demand, company performance, and broader economic factors. Investors buy stocks with the expectation that their value will increase over time, allowing them to sell at a profit or earn dividends, which are periodic payments made by some companies to shareholders.
Understanding stocks is essential for anyone entering the world of finance, as they play a critical role in both personal investing and corporate fundraising.
Companies issue stocks to raise capital for expansion, research, or other business needs, while investors use stocks to build wealth and diversify their portfolios. The stock market also serves as a barometer for economic health, reflecting investor sentiment and market trends. As you explore finance further, you'll discover how stocks interact with other financial instruments and how strategic investing can help manage risk and achieve financial goals.
Owners of shares of stock are documented by the issuance of a stock certificate. This certificate is a legally binding document that indicates the number of shares possessed by the shareholder. It also informs us of other aspects related to the shares, such as share classification and the stock’s par value.
Shareholders, also known as stockholders, include both individuals and corporations that own shares in a private or public corporation. Some consider stockholders to be a subclassification of stakeholders, as stakeholders include anyone that possesses a direct or indirect interest in the corporation.
Stockholders, whether individuals or institutions, hold legal ownership in a corporation through shares of stock. This ownership grants them a variety of rights, which can differ based on the type of stock they own (common or preferred). These rights typically include the ability to:
Among the more specialized rights are control and preemption. Preemptive rights allow certain shareholders the first opportunity to buy new shares before they are made available to others. We will explore control and preemption further in an upcoming lesson.
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