In simple words about stocks

03 March 2020

A stock is a certificate that gives the shareholder an opportunity to participate in a company’s profit and confirms the ownership of the authorised capital of the enterprise.
When buying a stock, the investor actually acquires a stake in the business, together with the possession rights and obligations.

Companies that issued stocks are called Joint Stock Companies or Public Limited Companies.
In simple words, a stock is a security that confirms your right to a share of the business. That is why it is called a share, the other usual names being equity or action, which comes from the Latin “actio” — right.

So what are these rights?

  • The right to a share of current profit in the form of dividend payments.
  • The ability to obtain ownership of a part of the property of the company during its liquidation.
  • The opportunity to take part in the management of the organisation — “voting right”. This one depends if the shares are ordinary or preferred. Only ordinary shares give the right to participate in the meeting of shareholders and vote on the issues raised.
    However, the holder of the preferred share has the right of the first priority to profit in the form of dividends, of course, if this profit is available.

Due to the latter feature, a stock is security unique in its kind. No other financial instrument gives voting rights.

Obviously, since the stock confirms your ownership, it is perpetual security. This is another important difference from other financial instruments. In practice, the life of a security is limited only by the life of the enterprise itself, during which the owner has the right to freely dispose his shares without restrictions: sell, give or gift.

The Stock Exchange or Bourse is the market centre where brokers trade securities including stocks. The trading in securities causes markets to change on the basis of supply and demand. Other factors greatly influence the prices such as political pressures which may cause stocks to become cheaper or more expensive, causing ups and downs in the price of stocks and the market in general.

The price of a stock is called the Nominal value. The total value of all shares is equal to the authorised capital.

  • The value of all ordinary shares is the same.
  • The value of the initial issue may not exceed its price.
  • Normally, the true value of the business is reflected in the share price but includes more than just only assets. There are also goodwill, intellectual property rights and expectations.

Emission value — the price of one share in the primary market.
Share premium — the difference between share premium and nominal value.
Balance value — the amount of pure assets per one share.

Generally, the balanced value is less than the market value, which could send the signal to the share price to fall depending on market conditions. If the balance value increases as a percentage of the market value, conversely, this could cause the share price to rise.

So people are buying stocks in hope that the value of the company will increase, and they will be able to sell stocks at a higher price. Stocks are often sold to buy back at a lower price, particularly if there is a conviction that the company’s current business development is poor but the future prospects look more solid! Of course, another reason to sell is to avoid loss when stocks are falling.

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