Stock Market Basics

Stocks and the trading of stocks is what make the stock market go round and round. To understand how the stock market works you first need to have a basic understanding of what stocks are all about. A basic definition of a stock is a good place to start. The definition of a stock is a share in the ownership of any given company. Stocks lay claim to the earnings and the assets of the company which means that the more stock a person has in a company, the greater is their ownership stake. Other words that are commonly used in this regard that mean the same as stocks are equity and shares.

If you decide to invest in stocks then you become a shareholder in the company. This is to say, therefore, part owner based on how many stocks you have purchased. Technically then you have a small claim on everything the company has from their furniture, to their contracts, to their trademark and so on. As a shareholder you have voting rights when it comes to making decisions and you are entitled to your portion of the company’s earnings.

The owning of stocks is represented by something known as a stock certificate. This certificate is proof of your ownership of stocks on paper. Years ago the shareholder was able to physically see the piece of paper but in the modern computer age the brokerage you deal with is likely to keep all of these records electronically. When shares are held in this manner it is referred to as holding shares “in street name.” This is done because it simplifies the process of trading shares. Trading by way of a computer or by way of the telephone makes for ease of convenience. Traditionally, if an individual wished to sell his shares he had to deliver the stock certificate to the brokerage himself.

It is important to be aware however that you do not become all-powerful just because you are a shareholder in a company. As well it does not mean that you have any kind of say in how a business is run on a daily basis. What does come with owning a share is a vote for every share. The more shares you have the more votes you get. Your votes count toward the electing of a board of directors at yearly meetings. Your rights beyond that are none.

Most regular shareholders are not bothered by the fact that the managing of a company is not in their control. The significance of being a person with shares in a public company is that you have a claim on the assets that the company brings in and you are also entitled to a percentage of the profits. The profits are more significant to you than the assets. In many companies dividends are the way in which profits are paid out to shareholders. As previously mentioned, the more stocks you own, the larger amount of profits will you receive. Your claim on the assets of a company only comes into play if the company goes bankrupt.

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