A stock is an equity security in a company. It entitles the owner to a proportional share of value of a company after all liabilities, including debt obligations, are met. Public stocks are the shares of publicly-traded companies. These securities provide the benefits of ownership in a company with the added benefit of liquidity in a financial market (one can invest or sell shares quickly and for a known price).
Companies issue stocks to investors to fund growth or to meet other obligations. Stocks are measured in units called “shares.” The more shares you own, the more ownership you have of the company. The total equity value of a company, or its Market Capitalization (“Market Cap,” for short), is the product of the total shares outstanding multiplied by the company’s share price.
For companies with high prices per share, it is possible to purchase fractional shares from brokers and exchanges. Fractional shares allow investors with less money to still gain access to valuable public companies.
There are two main types of stocks:
Common stocks: These give shareholders the right to vote on issues in annual meetings (including the election of directors to the board) and provide the opportunity for dividends but there is no guarantee. Generally, common stocks provide value to investors through price appreciation, growth in the value of the company.
Preferred stocks: Often preferred stocks do not have voting rights but these securities (typically) have guaranteed dividend payments. Additionally, preferred stocks have more priority in a company’s capital structure relative to common stocks. If a company experiences financial distress, investors in preferred stocks must be repaid in full before common stocks receive any monies.
You can trade (buy and sell) stocks on exchanges, as well as via private transactions. Some companies may offer employees stock in their benefits packages. However you buy stocks, laws and regulations help prevent fraud, tax evasion, and other illegal practices, as well as protect your rights as a shareholder.
Most people own stocks to sell for short- or long-term returns, to receive dividends (company payouts that usually happen quarterly), or to take advantage of voting rights.