Stock

DEFINITION of Stock

Stock, as a term, describes the ownership certificates of any company. A share refers to the stock certificate of a particular company.

WHAT IT IS IN ESSENCE

Holding a particular company’s share makes you a shareholder.

There are two types of stocks: common and preferred.

The difference is while the holder of the first has voting rights that can be exercised in corporate decisions, the second doesn’t. Preferred shareholders are legally entitled to receive a certain level of dividend payments before any dividends can be issued to other shareholders.

A single share of the stocks represents the fractional ownership of the corporation in proportion to the total number of shares.

In liquidation, the stocks represent the residual assets of the company that would be due to stockholders after discharge of all senior claims such as secured and unsecured debt. Stockholders’ equity cannot be withdrawn from the company in a way that is intended to be detrimental to the company’s creditors.

HOW TO USE

Traders and investors may buy low and sell high. There is a third, more risky way to profit from stocks: derivatives. These investments derive their value from underlying assets, such as stocks and bonds.

Stock options give you the possibility to buy or sell a stock at a certain price by an agreed-upon date.

A call option is the right to buy at a set price.

A put option is the right to sell at a set price.

Short selling is when you borrow a stock from your broker, sell it at today’s higher price, and then buy it at tomorrow’s lower price and return the stock to your broker.

There is no limit to how high the stock price could rise, in theory. Most financial planners advise individual investors to stick to buying and holding stocks for the long term. And to diversify the portfolio to gain the highest return for the least risk.