Jan 12th, 2008
Working Backwards: What’s a Stock?
According to Wikipedia, “A share (also referred to as equity shares) of stock represents a share of ownership in a corporation.” These can be either privately held or publicly held companies; this blog would primarily discuss stock in publicly held companies, but for this entry, we will primarily discuss imaginary stock in a non-existent privately held company known as Uncommon-Cents.net.
To simplify the Wikipedia definition a bit, when you own stock in a company, you own part of that company. Owning shares of common stock in a company usually allows you to vote on some corporate decisions. You may also have a share in the company’s income, the privilege of buying new shares issued by the company, and claim to a company’s assets if the company is liquidated. However, in the case of a company’s bankruptcy, a shareholder would typically receive nothing while a creditor (meaning someone who owns bond in the company) would be much more likely to receive some of a company’s assets. If Uncommon-Cents.net were a publicly held company (it’s not, and I doubt it ever will be), those who owned stock would be part owners of that company. They would have the right to vote on issues affecting the company and select a board of directors to run a company. However, if Uncommon-Cents.net went bankrupt, if there were any bond holders, they would be closer to the front of the line to receive some of the company’s assets than the shareholders, who may be at the very back of the line and receive nothing (or close to it).
The sale of stock in a company is one way of financing its expenses. It could also use debt (such as by selling bonds) to finance expenses without giving up part of the ownership in the company. If shares of stock of Uncommon-Cents.net was sold, it may be because the company is trying to raise money to buy new servers or pay for increased bandwidth costs. It could also issue bonds to finance some of the expenses as well.
A publicly held company is expected to try to build value in the stock of the company for the benefit of its shareholders. Publicly held companies usually have their shares available to be traded on a stock exchange. Stock shares fluctuate greatly, usually due to supply and demand but also for many other reasons, including the emotion and psychology of stock traders, forecasts for company profitability, and reported financial results. If Uncommon-Cents.net was traded on an exchange and reported profits that exceeded previous guidance and analyst expectations, its shares may skyrocket. Or they may not. If Uncommon-Cents.net failed to produce positive results, the shareholders may demand changes, like different members of the board of directors or different officers for the company.
Stocks are bought and sold daily at a stock exchange; most people use a broker (hopefully a discount broker!) to buy and sell stock, although there are several other ways. Those who are buying a company’s stock tend to believe the company will do well financially and the stock price will rise; those who are selling a company’s stock tend to believe the company will not be doing so well and the stock price will fall. If you believe that Uncommon-Cents.net is going to be doing great financially and bringing in lots of money in the near future, you may decide to buy shares in it; on the other hand, if you believe that Uncommon-Cents.net has done as well as it can and tough times are ahead, you may wish to sell your shares of it.
Tremendous amounts of wealth have been built over time by those who have held stock in American companies. Hopefully, this trend will continue over the years to come. Owning shares of stock is not just owning pieces of paper (or even virtual pieces of paper); it’s owning parts of companies, and as those companies do well, hopefully, you will too, and no, I’m not planning on selling shares in Uncommon-Cents.net anytime soon!
