Last updated on August 18th, 2019 at 09:43 pm.
If you’re new to investing (or even if you aren’t!), you might ask yourself: what does a stock represent?
Simply put, a stock represents a share in the ownership of a publicly-traded company. That’s why you might sometimes hear them referred to as “shares.”
Stocks can come either in the form of preferred stock or common stock.
Investing terminology can get a little jargon-y at times, but don’t let that scare you. Thought things can be a bit complicated at times, the more basic concepts don’t have to be.
Let’s dig a little deeper into what stocks represent.
Difference Between a Stock and a Share
If you’re wondering about the difference between a stock and a share, there really isn’t one. Or, to be more clear, these aren’t mutually exclusive ideas.
Stock represents ownership of a publicly-traded company. Therefore, a share is simply a single unit of that stock.
Initial Public Offering
If you’re wondering how companies issue stock in the first place, it starts with an initial public offering, or IPO.
As the name suggests, an IPO is a single day on which stock is initially offered to the public. This IPO investment allows individual investors and other companies to buy a piece of the company going public.
Companies typically offer shares in order to raise capital to fund projects. They also do so to grow the company.
The shares bought during the initial public offering can then be bought and sold on the open market.
Stock Represents Voting Privileges
One of the most important features of stocks is voting privileges. These voting rights allow shareholders to vote in company decisions.
This means that shareholders who own more stock have more voting power. This makes sense since they are more heavily invested in the company.
Stocks Represent Ownership
In addition to voting rights, shareholders own the company. That gives them more rights in some cases than others.
This is one of the biggest differences between preferred stock and common stock. Preferred stock is given higher priority for dividends.
Because shareholders own the company, they also claim rights to company assets in the event of a liquidation.
Issuing Additional Shares
Although a company’s initial public offering (IPO) is when it first offers shares to the public, that is not the only time this happens.
Companies may offer additional shares at any point after the additional IPO. They usually offer additional shares for the same reasons thy had an IPO.
Note issuing additional shares could dilute the existing shareholders’ stake in the company.
Stocks Represent Growth Potential
Another one of the benefits of stocks is their growth potential. While money might be less volatile in a savings account for example, it probably won’t grow very much there.
Stocks, on the other hand, usually grow in the long run. The 100-year history of the stock market shows a clear upward trend. Sure, there have been periods of time when the market shrunk. Still, we can see from this chart that the market has grown to nearly 20 times its 1918 size.
Keep in mind that this history is also the entire stock market. Plenty of individual companies have failed in this time period. That’s why total market index funds are so nice. Even if many of the companies that are a part of that fund fail, your money will likely still grow overall.
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Hopefully you have found this information useful. Stocks can seem complicated, but they don’t have to be!