Whether you're looking to become the next Wall Street investment tycoon or simply searching for a place to put that wad of dough you've had stashed away in an old gym sock, you'll need to become familiar with terms like "stock" and "share." Simply put, stock represents ownership, also known as equity, while a share represents an individual unit of ownership.
Stock represents ownership in a corporation. Companies sell stock as a way to raise operating capital for their business. A share signifies one unit of stock, which can be bought and sold by investors. Share prices can go up or down depending on factors like economic and industry conditions. Good news about a company, such as a report of strong earnings, can cause the share price to go up, while a report of a layoff or declining sales may reduce the share price.
Buying and Selling Shares
Shares of stock are bought and sold over a stock exchange, also referred to as the stock market. Common stock exchanges are the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX). Companies list their stocks for sale on an exchange, where owners can buy and sell them with the aid of an investment professional known as a stockbroker. With the advent of the Internet, investors can now make stock transactions online.
To illustrate how a stock transaction would work, suppose you had $1,000 that you wanted to invest in the Sweet Smell of Success Deodorant Company. If the price of the company's stock was listed at $20 per share, you could purchase 50 shares of its stock. If a sudden heatwave caused a run on Sweet Smell's products at stores and the share price jumped to $30 per share, you have earned a cool $500 profit (50 shares at $10 per share).
Companies may sell shares of common stock, preferred stock or both. Common stock provides investors with benefits like the right to vote during company board of director elections, and you'll typically get to cast one vote per share that you own. Preferred shareholders are the first in line to receive dividends, which are earnings that are distributed by a company to shareholders on a quarterly basis, but normally do not have voting rights.
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- Does Stock Buyback Reduce Equity?