Definition of a Stock
By Samantha A. Bow | March 15th, 2009Reading financial papers or watching a finance channel can be much more confusing than it needs to be if you don’t know what a stock is. Stock is bought for the pursuit to make money, but what exactly is it and how does it make you money? We need to begin by explaining what a corporation is.
The three main types of business entities include a sole proprietorship, a partnership, and a corporation. A sole proprietorship is run and owned by one person, a partnership is run and owned by 2 or more people, and a corporation is owned by many people. These people are called the shareholders and they elect the board of directors who run the company. The board of directors choose the executives of the company who run the day to day business.
Each one of the shareholders own a part of the company. They elect the board of directors who hire the officers that run the company. While shareholders don’t make decisions such as where to spend money and what to market, they do decide who will make those decisions.
In order to become a shareholder, you must buy a share of that company. This is called a share of stock. If you buy one share of stock of Apple, you have become an Apple shareholder. When you hear ‘stock’ this is actually a general term which could mean one or more shares. You can buy one share of stock, or you can buy a thousand shares of stock. It is up to you.
Corporations issue shares of stock in order to raise money for the business. When they decide to sell stock, they are taking in a profit for the stock they sell. This money is called equity. This is why when you buy stock of a company you have equity in the company. For example, if a company has become incorporated and has decided to sell stock, they could issue 200,000 shares of stock, sell each share for $2, and raise $400,000 in equity. They can use this equity to build their business. If you were to buy some of this stock, you would become a shareholder.
How do stocks make money? They increase in value through supply and demand. If you buy one share of Company A stock for $10, you have a purchase price valued at $10. If a lot of people want to buy the stock, they will have to pay a higher price if there are fewer people willing to sell.
When the demand for the stock goes up, the price goes up in order to discourage some buyers from purchasing to make sure there is still enough for those who do want to buy. If you see that the price of the stock you sold is up to $14, you can sell it for a $4 profit.
You can also make money through dividends of the company. A company pays dividends they have made a net income and want to pay their shareholders. If you buy 1,000 shares of a company that issues a quarterly dividend of 35 cents, you will be paid $350 a quarter or $1,400 for the year.
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