All about stocks

Introduction to stocks:

Stocks, a fantastic category of financial instruments, are one of the greatest tools ever invented to generate wealth. The interest of investors in stocks has been growing exponentially for the last few decades. Stocks which were once the choice of rich are now have become the vehicle of wealth building even for common man. Adding to this demand, trading technology has improved many folds making it easy for anyone to invest in stocks.

What are stocks?

Stock in simple terms is a share in the ownership of a company which represents a claim on the company’s assets and earnings.  Thus one’s stake in a company increases with the increase in number of shares one holds. Being a shareholder of a public company doesn’t ensure a say in the day-to-day happenings of the company but every shareholder will have right to vote during selection of board of directors at annual meetings with one vote per share. But in reality minority shareholders generally don’t involve directly in any decisions taken by the company, but they always have an option to buy or sell the shares of the company thus influencing management’s decision indirectly.

Why Companies issue stocks?

In the process of expansion of a company, company needs to raise money which can be done through borrowing or by selling a part of the company i.e., issuing stock. Companies generally borrow from banks or by issuing bonds which is called as debt financing. Raising money through issuing stocks is called as equity financing. The disadvantage with debt financing is that company needs to pay interests regularly which can be avoided through equity financing. The only thing shareholders expect from a company is that their share value to be more than what they have invested initially at some point in future. The very first time when a private company issues shares in the market is called as Initial Public Offering (IPO).

What is in it for a shareholder?

Someone who invests in bonds will be guaranteed the return of his investments, but it is not the case with someone who invests in shares. As shareholder is partly owner of the company, shareholders assume risk of the business and claim on assets would be less than what a creditor will have. That means, if a company is bankrupted and is liquidated, a shareholder doesn’t get any money unless banks and other bondholders are paid for their claim. Thus, a shareholder earns a lot of money, if a company is successful and stand to lose equally their complete investment if that company is not successful. Companies also payout dividends on a regular basis but there is no obligation for the company to do so.

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