What are Stocks or Shares?
Stocks or Shares are generally termed as small units of the company ownership. Stocks or shares are also sometimes referred to as equity or equity shares, and issues by companies for raising funds. You’ve most likely heard the definition of what a stock is: “A stock is a share in the ownership of a company. Stock represents a claim on the company's assets and earnings. As you acquire a lot of stock, your ownership stake in the company becomes higher”. Sadly, this definition is inaccurate in some key ways.
To start with, stockholders don't own corporations; they own shares issued by corporations. As corporations are a special form of organization as the law treats them as legal persons. In other words, corporations file taxes, can borrow, can own property, and can be sued by its own name.
What shareholders own are shares issued by the corporation, and the corporation owns the assets. Therefore if you own 25% of the shares of a company, it's incorrect to say that you own one-fourth of that company. It's instead correct to state that you simply own 100% of one-fourth of the company’s shares. Shareholders can’t do anything they want with the company assets because legally the assets are owned by the company itself.
So what do these shares used for, if they aren’t really the ownership rights we think they are? Owning stock provides you the right to vote in shareholder meetings, receive dividends (profit share), and it provides you the right to sell your shares to someone else.
For big investments, if you own a majority of shares, your voting power will also increase, so that you'll be able to indirectly control the direction of a company by appointing its board of directors.
Difference between Stocks & Shares
In today's money markets, the difference between stocks and shares has been somewhat unclear. Generally, these words are used interchangeably to refer to the negotiable instruments that denote ownership in a particular company, also known as stock certificates. However, the difference between these two words comes from the way they are used.
For example, "stock" is a general term used to describe the ownership certificates of any company, and "shares" refers to the ownership certificates of a specific company. So, if investors say they own stocks, they are probably referring to their overall ownership in one or more companies. On the other hand, if someone says that they own shares then they are probably denoting about specific company shares.
But remember, general public used to use these two terms “stocks” & “shares” interchangeably.
Why company issues stocks or shares?
Stocks or Shares – sometimes referred to as equities or equity shares – are issued by companies to raise capital for business expansion. When the corporation issues shares, it does so in return for money.
Now the question is that why they issue shares instead of borrowing money from the bank or by issuing bonds? - We know companies can raise money through borrowing, either directly as a loan from a bank, or by issuing bonds. But there are numerous negative points associated with it. Firstly, bondholders or banks are creditors to the corporation and are entitled to receive interests as well as repayment of principal. And secondly, in case of loss in business, if the company unable to repay the creditors, then legally the company is bound to sell assets in order to repay them.
On the other hand, if the company raises funds by issuing shares then they are receiving the required funding without any obligation & without any interest payable. The only thing is that they have to pay dividends (profit share) to the investors in some scenarios, but it's not mandatory. [See our guide explaining dividend, dividend rate, and dividend ratio]
The shareholders are benefited if the company performs well in the market, either by receiving dividends or selling the shares they hold to someone else at a higher price. Theoretically, the amount of profit one can gain from well-performing stocks or shares is infinity.
Different Types of Stocks or Shares
There are different types of stocks or shares issued by companies, those are:
(i) Equity Shares or common stocks.
(ii) Preference Shares or Preferred Stocks.
Equity Shares or Common Stocks are offered (or can be purchased) either through Primary Market [such as IPO (Initial Public Offering), FPO (Follow-on Public Offering), Rights Issue] or through Secondary Market [Such as from Stock Exchanges]. We, common peoples, are not entitled to buy stocks directly from company or market. For that, we need an account with stockbrokers who can purchase or sell stocks on our behalf.
We will be doing a detailed discussion about stock brokers and stock types in later publications.
To Learn more about Stock or Share Types check this Article.