Listen to our podcast episode on this topic, “What are stocks and how are they purchased?”
What is a stock is a commonly asked question. Buying shares in a company gives the investor a direct ownership stake. Share ownership has its potential benefits including a vote on company affairs, a dividend and hopefully capital appreciation. There is also a level of consumer protection since public shares are regulated by government organizations.
What is a Stock?
When people refer to “stocks” or the “stock market,” they usually mean common shares. A common share is a financial security that gives the holder an ownership claim in a company.
Features of Stocks
That ownership stake will give the holder the right to receive dividend distributions and a vote at the company’s annual meeting. The shareholders vote to elect the directors of a company who in turn appoint the company’s management and set the dividend policy. The shareholders have specific rights under both corporate law and the company’s bylaws. Shares that are “publicly listed” on stock exchanges mean the company is required to provide information or “disclosure” to their shareholders in return for being publicly traded. Common shares are also referred to as “equity securities” or “equities” alluding to the accounting term “Owner’s Equity.” Investors and commentators use the terms “equity market” or “equities” when they refer to stocks or the stock market.
Equity investments are securities that represent ownership in businesses. This ownership is purchased in the form of shares.
Common shares have voting rights attached, which permit the owner of the shares to vote at the company’s annual meeting. Common shareholders are also entitled to share in the company’s profits through dividend distributions. Shares can be private or public. Private shares do not require approval by regulatory authorities.
Public shares have legal disclosure requirements and are regulated by government securities regulators like the Ontario Securities Commission (OSC) in the Province of Ontario or the Securities Exchange Commission (SEC) in the United States. Public shares are also “listed” on stock exchanges such as the Toronto Stock Exchange (TSX) in Canada or the New York Stock Exchange (NYSE) in the United States. These exchanges also regulate the issuers of shares that trade on their exchanges and the investment dealers who trade shares on the exchanges. Stocks that do not trade on a centralized exchange are traded “over the counter” (OTC) through trading organizations such as the National Association of Security Dealers Automatic Quotations (NASDAQ).
Determining Stock Prices
The trading between buyers and sellers is what sets stock prices. At any point, the price of a stock reflects the price at which sellers are willing to sell, and at which buyers are willing to buy. Ultimately, this reflects interest rates and the prospects for the economy of individual stock issuers. There are many theories of stock and market valuations, with only a few influencing factors outlined here.