Also known as “share”. Stocks are the individual divisions or parts of a company’s stock or share capital. They are individual pieces of the common stock of a company that give their owner a proportional right of ownership of the company’s capital.
The possession of this legal document gives a personal the title of “stockholder” (or “shareholder”) and gives them the right to receive yearly earnings, usually in the form of a dividend, from the company. There are nominative stocks, bearer shares, ordinary stock and preferential stocks. stocks are valued in three ways:
- Nominal value: the relationship between the amount of capital put up by the shareholders and the number of shares.
- Book value: the relationship between the value of the stock after discounting (subtracting) the debts from the investments and the number of stocks.
- Market value: the value that the stock receives when it’s traded on stock markets. Depending of the quality (voting rights, preferential stocks, etc.) and the quantity of stocks owned this more or less determines the decision making power and influence that the stockholder has within a company compared to their peers. One way to expand or grow a business with going into debt is by issuing capital in the form of stocks.
For investors a stock is equivalent to an investment in a product with variable earnings since it depends on the how well a business works and can, therefore, lose or gain value on stock markets or books where they are classified. However, if a business makes a profit, the value of the stock increases and the investor will obtain earning in the form of a dividend if the stockholders decide to do so. Different classes of stock exist and can have different characteristics. For example, there are 5 main types of stock:
- Blue-chip stocks: stocks issued by strong companies with a long history of excellence in the business world, paying small dividends but remaining relatively stable over time.
- Growth stocks: stocks issued by start-ups and that can experience rapid growth as the business grows. These usually don´t have dividends since the company usually needs all of its capital to get going but the risk premium is higher since investing in these companies is riskier.
- Cyclical stocks: stocks that are issued in relation to the economic up-turns and down-turns with their value increasing and decreasing accordingly. Ex. Auto manufacturers.
- Defensive stock: opposite of cyclical stocks. These usually maintain their price during market volatility. Ex. Major pharmaceutical companies.