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A stock is a share in the ownership of a company and represents a claim on its assets and earnings. A public company�s value is defined by its market capitalization (market cap) which equals the actual price of one share times the number of shares. For example, General Electric was the biggest company for 2004 with 382 billion $ market cap (source: FT global 500).
When a corporation issues stock in the primary market, it is using equity financing as opposed to debt financing.
Stock investors, called shareholders, get a portion of the company�s equity, or shares in exchange of cash; these allow them to obtain a portion of the company�s profits which they receive sometimes in the form of dividends. However, in the case of bankruptcy and the liquidation of the company, their claim on assets is only valid after all the creditors have been paid out: they receive what is left after all the debts have been paid.
Shareholders assume the risk of the company not being successful. They earn a lot if the business is doing well, but they also stand to lose their entire investment if the company is in bad situation.
There are two main types of stocks:
Common stock allows investors to get one vote per share to elect the board members, who oversee the major decisions made by the management team. It gives the investors a right to receive dividends that may vary over time: sometime, the shareholders don�t receive any dividend at all especially when the management has decided to auto finance the company�s growth, or simply because of a bad quarter.
Preferred stock represents some extend of ownership in a corporation but usually doesn't come with the same voting rights. However, unlike common shareholders preferred shareholders are generally guaranteed a fixed dividend forever and in the event of the corporation�s liquidation they are paid out before the common stock investors but still after the creditors. Finally, the company has the option to purchase the preferred shares from the investors at anytime and for any reason since the preferred stock is generally callable.
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