Stock Definition

Stock represents ownership in a company and can be bought and sold; owning stock means having a share of the company's assets and potential profits.

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Stocks are a type of security that represents an ownership interest in a company. Companies sell stock to help expand and invest in their business. 

This article will explain the definition of stocks, the advantages and risks of stocks, and how issuing stocks can help grow your company.

Stock Definition

When you purchase a company’s stock, you’re buying a small piece of that company. This is also called a “share.” It’s called a share because stocks represent a share of the company’s profits. When you buy stocks, you become one of the company’s shareholders. In this article, we’ll use the terms “stockholder” and “shareholder” to mean the same thing.

Public companies can list and sell their stocks on stock exchanges, like the New York Stock Exchange (NYSE). The stock exchanges track sales of each company’s stock and publish information about supply and demand. This information, in addition to company events, impacts share price.

Understanding Stocks

Types of Stocks

There are two main stock types you are likely to encounter. These are common stocks and preferred stocks. Common stockholders have the right to receive dividends and vote in shareholder meetings. Common stocks are what you think of when you think of the definition of stocks. 

Preferred stocks, on the other hand, have limited or no voting rights. But preferred stockholders usually get their dividends paid first and get a higher dividend payout. In the event the company is liquidated, preferred shareholders may have a claim on the company’s assets.

Buying Stocks

As we mentioned, investors usually buy public company stocks on exchanges like NYSE. A company “becomes public by offering its stock for public sale.” This is called an initial public offering (IPO) and is the process by which stocks become available for investors to buy and sell on an exchange. 

Stocks Advantages

Stock’s advantages over other types of investment products are numerous. Here are a few of the top benefits of investing in stocks:

  • Dividends: A stockholder can receive a share of the company’s earnings in the form of dividends.
  • Tax Benefits: If you sell your stock for more than you paid for it, you may benefit from paying capital gains taxes instead of ordinary income tax. If you want to know more about tax advantages, be sure to talk to a qualified accountant. 
  • Voting Power: If you don’t agree with company management, why not vote for a change? Voting rights can be a powerful thing.
  • Limited liability: When a company encounters financial trouble, shareholders aren’t personally liable for any loss.

These are only a few stock benefits. As an investor or small business owner, you’ll have to make the financial decisions that best benefit your circumstances.

Stock Disadvantages

Stock disadvantages include the risk of loss. When investing in the stock market, you may lose your entire investment. You may buy shares of a hot new IPO at $100, but within a few weeks, that stock may sell for only $10. Unfortunately, no one will refund you the $90 per share that you lost in the market.

Why Do Companies Issue Stocks?

Corporations issue stock to raise capital. Sometimes, companies use the money they make from selling their stock to expand their business. Other times, selling stock helps companies pay back early investors who put money into the business before its IPO.

Stocks: A Summary

In short, stocks are a type of security that indicates an ownership interest in a company. They are used to help a company grow. A corporation issues stock to help their company grow and to fund all kinds of business purposes and operations.

We Can Help You Grow Your Company

Looking for ways to grow your small business? The good thing about stocks is that they are about business growth. If you are looking to set up a corporation, we can help you set one up virtually anywhere in the U.S. Our Corporate Formation Service can help you form your entity quickly and easily. Running your business as a corporation can enable you to issue stock and potentially take part in an IPO. And once you’re up and running, we can help you with business entity compliance with our Worry-Free Compliance Service.

Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.

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Written by Team ZenBusiness

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