What are Stocks?
While this may seem like a basic question, many investors are not able to properly answer it. Stocks represent share ownership in the underlying company or organization. They represent a financial claim to the company's income and assets. Stock ownership can be represented by a physical stock certificate, although most investors of today choose to own their shares electronically within a brokerage account. Companies issue stock as a method of raising capital. Companies can also issue bonds as a method of raising debt capital.
Different Types of Stock
There are several different types of stock to consider:
| • Common Stock- The most ‘common’ form of stock
issued, giving the owner the right to capital appreciation and dividends
from the underlying company. |
| |
| • Preferred Stock- A similar ownership as common stock,
yet investors are not typically granted the same voting rights. |
How Stocks Trade
Most stocks trade on exchanges, such as the well known New York Stock
Exchange (NYSE). Exchanges allow buyers and sellers to exchange shares
of stock at an agreed upon price. The primary market refers to where
securities are created and sold, while the secondary market refers to
where previously issued securities are bought and sold. In addition
to the NYSE, many investors may have heard of the NASDAQ, an over the
counter market. Unlike the NYSE, trading does not occur on a trading
floor, but rather electronically.
The price of a stock will vary daily, even by the minute, based upon
the market. Supply and demand factors will drive stock prices up and
down, allowing investors to capitalize on market movements. When supply
is low and demand is high, the price is driven upward. Likewise, when
demand is low and supply is high, the price declines.
Another significant factor which drives stock price is earnings reported
by the underlying company. Earnings affect the overall profitability
for the company. Given the theories of what drives a stock’s price,
there are still circumstances which can cause the value to increase
despite fundamentals. For example, during the late 1990’s, internet
companies experienced a sharp price boom despite earnings reports which
did not match up.
