Stock - What is a stock?
A stock as it relates to finance refers to the shares of a business. Stock possession indicates a portion of ownership of the business.
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By purchasing stock in a business, you become a stockholder (also called a shareholder). The stock that you own in that business means that you own a percentage claim on the earnings as well as the assets of the business.
Stock is often bought with the hope that the business will experience increased success resulting also in profit for the shareholder. The amount of profit or loss depends on the performance of the company in the stock market and how much stock a particular person possesses.
Stock vs. share
The term ‘stock’ is commonly heard used interchangeably with ‘share’, however the two do have a slight differentiation.
Stock refers to a more general ownership of stocks in any given business. It is often multiple, different businesses and is further detailed in a portfolio.
Share is generally more specific. When someone mentions that they own shares in a business, the follow up question is generally: ‘Which company?’.
It is a small differentiation that nevertheless is often overlooked when discussing stock and shares.
Types of stock
Within the definition of stock, there are two different types. The main differences involve how the shareholder experiences the ownership of the percentage of the business and the risk involved. Both types are provided by companies and bought and sold by investors.
As its name implies, common stock is the type most commonly bought and sold. Profit on common stock held by the shareholders is made through dividends or capital gains. When you hold common stock you have a right to that stock and can purchase or sell as you choose.
Common stock shareholders also have voting rights when it comes to some activities of the company. Voting weight is directly related to the amount of stock in the company that a particular shareholder possesses.
Preferred stock is considered more stable than common stock, however comes with certain risks such as that the company can choose to buy the stock back from the shareholder at any time, for any reason. It also does not come with voting rights for the shareholder like common stock.
However, preferred stock results in shareholders receiving their dividends before those that hold common stock and also means regular and fixed payments from dividends (common stock is more often associated with providing higher yields over time).