Stock is the units into which ownership of an organization is divided during stock market trading. In common American English, the stocks are collectively referred to as ‘stock’. Each share of stock represents a fractional ownership in percentage of the whole stock.
Some types of companies include common stock, preferred stock, debt stock, initial public offerings (IPOs), exchange traded funds, and restricted stock. Common stock, also referred to as ‘stock’ in the United States and in some other countries, is generally recognized as a liability on the balance sheet. The profit and loss results of operations and trading in the company are reported on the business’s balance sheet. Preferred stock generally provides the owners with voting rights attached to a particular number of issued shares of stock. In the case of IPOs, an investor will have the right to purchase a particular percentage of the total stock in the company.
Debt stock, or ‘liability stock’, represents securities that are used in the financing of a company’s long-term debts. These include long-term debt and lease payments. Interest income and capital gain from the sale of these securities are reported by the company on its income statement. This form of stock is very similar to common stock but it does not represent the ownership interest in the company. Limited liability is a type of stock that provides limited control by the shareholders over the use of the invested funds.
An IPO is a public offering of company stock by a private investor. IPOs can either be an open market issue or a successful offering by an individual or group. When an IPO occurs, only the buyers of the stock are allowed to buy (the ‘underwriters’) and there are restrictions on how they can trade the stock. Once the proceeds from the IPO are raised, however, they can begin trading the stock on the secondary market.
Private sales are also referred to as Pink Sheets. On public stock exchanges, however, private sales are listed separately from the public offering. In a private sale, an individual or group sells shares of stock to one another. These transactions are not reported to the SEC, (Securities Exchange Commission) as transactions on public stock exchanges. Auctions are a process in which the proceeds from a sale of a company’s stock by an individual are sold to an entity, called the auctioneer, who then resells the stock to investors.
Some companies may offer two or more types of common stock. Common stock is usually issued by a company that is experiencing growth in order to raise funds. Preferred stock is issued by a company that expects to receive a premium from the investors of the preferred stock. A company may also issue preferred stock without offering common stock to the public in an IPO. The proceeds from the sale of preference stock are exempt from the reporting requirements of Securities and Exchange Commission rules.