Stocks are shares of a company and represent fractions of their ownership. They entitle the owners to rights over how the company – and its profits – are managed. The most common right is the right to vote on members of the board of directors.
Stocks, by definition, entitle their owners to limited liability, limiting their responsibility to their initial investment in case the company suffers losses. If the company suffers a loss or has debts, the worst loss for the stock owner is reflected in the stock’s value and/or yielded dividends. The owner of the stock can not be held personally responsible and face legal procedures as a result of the company’s actions.
Not all company stocks can be traded on the stock markets. Most of the bigger company stocks can, though. These companies are called public, as they have made their shares available to the general audience. Such companies usually go public in order to raise funds to fuel growth.
Two types of stocks: common stock and preferred stock.
Common stock is by far the most popular stock type in online stock trading. It most often gives owners voting rights and dividends, and usually performs better than preferred stock.
Preferred stock, while usually yielding less performance and not allowing voting rights, generally provide owners with a slightly more secure investment: in case of liquidation, they have priority over common stock. They also have priority over dividends. Some preferred stock can be converted to common stock if such a feature is specified on their release.
If a company has 10 million stocks issued that are each valued at $10 a piece, the product – 100 million dollars – would be called the market capitalization of that company. Market capitalization is a way to measure the weight of a company, its value on the market. The price of the stock is not. For instance, that fictitious company could have very well decided to issue 1 million stocks instead, at $100 a piece, and it would still be worth 100 million dollars.
Therefore, stock worth $200 each from company A is not necessarily better than stock worth $5 each from company B. Stock traders have to be careful not to think that lower priced stocks are necessarily a bargain!