What Is A Stock?

What Is A Stock?

Stocks are shares of a company divided up evenly into a certain number of proportional parts. While this does not necessarily mean that you are an owner of the company, it means that your share of the company is subject to rises and falls, depending on the success of the company. Stocks are usually all traded on what is known as the stock market, a consolidated trading location where all companies offering stocks can converge. Stocks can only be traded if the corporation is public; that is, they are no longer under complete private ownership, and can theoretically be owned by anyone who purchases stocks.

What a Stock Represents

Now, to understand how stocks work, here is a relevant example. Say you are trying to start a beer company but you need some capital to get off the ground. What you will do is divide the company into a certain number of shares (say, 2000 pieces) to raise a total of 100,000$, so you offer 50$ stocks to all of your closest friends and family. That will mean that everybody who buys a stock will be entitled to 1/2000th of that beer company’s profits. On most major stock markets, this earned amount on each share is called the ‘earnings per share’, or EPS.

Now, this still leaves the question: How do these stockholders guarantee that the company is headed in the right direction and is pulling in a profit? This is most often resolved by appointing a select few as the board of directors of a company, which may include employees, but will first and foremost include a group of elected shareholders. They can also decide what to do with the money earned from the rise of the stock. They could, for example, use it to pay cash dividends, or they can rather use it to re-purchase more stock.

Virtual screen featuring stock market numbers.

Wall Street Stocks

Stocks on an official stock exchange—or Wall Street stocks, as some know them—are dealt with a little differently. Unlike the conventional stock that you may divide up between your friends and family, traders on the Wall Street floor will treat it more like an auction. Investors want to make money, and they must be aware of market fluctuations and the potential growth or decline of other companies. What will happen at first is traders will look to sell a stock at full price for whatever reason (for example, another company may be growing faster, and they want to put more investments in them), then if that does not work, then they will lower the price of their share. If it looks like the stock prices may rise in the future, then they may sell their stocks at a higher price than the original share price. In that case, the value of the stock will rise and end up at a slightly higher value. This is why the stocks of profiteering companies will grow and the stocks of struggling companies will decline.

One reason that seasoned stockbrokers are unaffected by stock market crashes is that they know that they cannot blame the company as much as the person who does not have faith in it. A lot of companies may bounce back from their fall too, so to lose all faith in a company because of one blip may not be advisable. Another reason Wall Street stockholders are indifferent to market fluctuations is that when share prices decline, they can buy higher stakes in the companies they actually want to invest in. For example, if your beer company has gone public (i.e. is on the stock market), and people begin to panic and sell, then you can buy those shares for a lower price and maintain a higher level of inclusion in the company.

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