What are Stocks?
Capital stock of a company or business entity represents the original capital invested in the business by its founders. Stock serves as a security for the creditors or investors of a business, since the certificates cannot be withdrawn to the detriment of the creditors. Stock is held separately from the assets and property of a business; these forms of capital fluctuate in quantity and value.
The stock of a company or a business entity is divided into shares, the total of which is stated at the of business formation. Given the total amount of capital invested, shares possess a certain declared face value, commonly known as the par value.
The par value of a share is the minimum amount of money that a business entity may issue and sell shares and it is the total value represented as capital in the accounting of the business formation.
In a few jurisdictions, however, shares may not possess an associated par value; such stock is referred to as non-par stock.
Shares represent a fraction of ownership in a business; an entity may declare different types or classes of shares, each possessing a distinctive form of ownership, value, rules and privileges.
Ownership of shares is documents by the issuance of a tangible stock certificate. Stock certificates are legal documents that specify the amount of shares owned by the shareholder, and other specifics of the shares, such as the par value.
Types of Stock:
In a common view, stocks typically take the form of either common or preferred shares. In regards to a unit of ownership, common stock typically carries voting rights that may not be exercised in corporate decisions.
In contrast, preferred stock typically does not carry voting rights but is legally entitled to the obtainment of dividend payments before any other dividends may be issued to common shareholders.
Convertible preferred stock is a type of preferred stock that includes an option for the holder to convert the preferred shares into a fixed number of common shares, typically after a predetermined date.
New issues of stock are often attached with specific legal clauses that differentiate them from the previous issues of the issuer. For instance, some shares of common stock may be issued without the typical voting rights and some shares may have special rights unique to them and only issued to certain parties. In most cases, new issues of stock that have not been registered with a securities governing body are restricted from resale for a determined period of time.
Stock derivatives refer to any financial instrument that contains a dependent value on the price of the underlying stock. Options and futures are the primary types of derivatives within a stock.
Stock futures are in essence contracts, where the buyer is long (thinks the stock will gain in value) and obtains an obligation to purchase the stock on the contract’s maturity date. In turn, the seller is short (thinks the stock will decrease in the future) and takes on the obligation to sell.
A stock option is a class of options, where two parties will agree to buy (call option) or sell (put option) the stock at a specific date for a specific price.