Stock Market Concepts – What is a Stock? How Does It Work?
Stock is the whole of the stocks owned by a company. In common American English, the stocks are collectively referred to as’stock’. Each share of stock represents fractional ownership in accordance to the number of outstanding shares. This means that each owner of a particular stock is entitled to a right to one fifth of the whole stock issued.
The value of stock is determined according to how the market expectations regarding the company’s future prospects are evaluated by the market makers. In United States, stock prices are determined by a number of factors like the company’s financial performance, its competitive position and sector. This information is communicated to common stockholders through a company bulletin or statement. Once this is issued, stock prices of that company starts falling.
A company obtains necessary permits and licenses to operate from the United States Securities and Exchange Commission or SEC. The SEC regulates the selling of securities by publicly traded corporations. There are laws that govern the sale of common stock and it is usually followed by the law of public choice.
Every shareholder has the right to vote for the payment of dividends. The corporation pays this dividend to its holders, who then usually choose to sell their existing stocks. The stocks are usually traded on major exchanges such as New York Stock Exchange or NASDAQ. These exchanges allow the traders to buy and sell shares that have the effect of increasing or decreasing the price of stock. In addition, when a corporation makes an acquisition, most of its outstanding shares are usually bought by the corporation for less than the total amount owed on them.
Investors can invest in companies that issue dividends along with regular stock sales. There are certain restrictions in relation to dividends. Usually, they have to be paid only if there are investors who actually receive them. Also, these payments are only tax-free if received from a qualified retirement account or if they are made under a specific tax year. Companies may also give their first stockholders an option to receive unlimited dividends for a specified period.
There is a popular practice among investors where they would purchase stock that is expected to gain in value in the future. They could buy the stock and wait for its price to rise higher before selling it. However, this is not usually recommended because there are chances of the company’s price falling again. This is called the’stop-loss’ clause. Investors can get out of this lose-making position by selling all or most of their shares.