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Stock

2007 Schools Wikipedia Selection. Related subjects: Business; Economics

   Securities

   Securities
   Bond
   Commercial paper
   Hybrid security
   Stock
   Warrant

   Markets
   Bond market
   Stock market
   Stock exchange

   Stocks
   Share
   Stock
   Warrant

   Bonds by coupon
   Fixed rate bond
   Floating rate note
   Zero coupon bond
   Inflation-indexed bond

   Bonds by collateral
   Asset-backed security
   Collateralized debt obligation
   Collateralized mortgage obligation
   Credit linked note
   Mortgage-backed security
   Unsecured bond

   Bonds by issuer
   Corporate bond
   Government bond
   Municipal bond
   Sovereign bond

   In financial markets, stock is the capital raised by a corporation
   through the issuance and distribution of shares.

   A person or organisation which holds share of stocks is called a
   shareholder. The aggregate value of a corporation's issued shares is
   its market capitalization.

   In the United Kingdom, the word stocks refers to a completely different
   financial instrument: the bond. It can also refer more widely to all
   kinds of marketable securities. The term "share" still means the stock
   issued by a corporation, however. These definitions also hold true for
   Australia.

Type of stock

   There are several types of stock:

Common stock

   Common stock, also referred to as common shares or ordinary shares,
   are, as the name implies, the most usual and commonly held form of
   stock in a corporation. Shareholders of common stock have voting rights
   in corporate decision matters. It is the residual corporate interest
   that bears the ultimate risks of loss and receives the benefits of
   success.

Preferred stock

   Preferred stock, sometimes called preference shares, have priority over
   common stock in the distribution of dividends and assets.

   Most preferred shares provide no voting rights in corporate decision
   matters. However, some preferred shares have special voting rights to
   approve certain extraordinary events (such as the issuance of new
   shares, or the approval of the acquisition of the company), or to elect
   directors.

Dual class stock

   Dual class stock is shares issued for a single company with varying
   classes indicating different rights on voting and dividend payments.
   Each kind of shares has its own class of shareholders entitling
   different rights.

Treasury stock

   Treasury stock is shares that have been bought back from the public.
   Treasury Stock is considered issued, but not outstanding.

Stock Derivatives

   A stock derivative is any financial claim which has a value that is
   dependent on the price of the underlying stock. Futures and options are
   the main types of derivatives on stocks. The underlying security may be
   a stock index or an individual firm's stock, e.g. single-stock futures.

   Stock futures are contracts where the buyer, or long, takes on the
   obligation to buy on the contract maturity date, and the seller, or
   short takes on the obligation to sell. Stock index futures are
   generally not delivered in the usual manner, but by cash settlement.

   A stock option is a class of option. Specifically, a call option is the
   right (not obligation) to buy stock in the future at a fixed price and
   a put option is the right (not obligation) to sell stock in the future
   at a fixed price. Thus, the value of a stock option changes in reaction
   to the underlying stock of which it is a derivative. The most popular
   method of valuing stock options is the Black Scholes model .

   Apart from call options granted to employees, most stock options are
   transferable.

History

   The first company to issue shares of stock was the Dutch East India
   Company, in 1602. The innovation of joint ownership made a great deal
   of Europe's economic growth possible following the Middle Ages. The
   technique of pooling capital to finance the building of ships, for
   example, made the Netherlands a maritime superpower. Before adoption of
   the joint-stock corporation, an expensive venture such as the building
   of a merchant ship could be undertaken only by governments or by very
   wealthy individuals or families.

Shareholder

   A shareholder or stockholder is an individual or company (including a
   corporation) that legally owns one or more shares of stock in a joint
   stock company. Companies listed at the stock market strive to enhance
   shareholder value.

   Stockholders are granted special privileges depending on the class of
   stock, including the right to vote (usually one vote per share owned)
   on matters such as elections to the board of directors, the right to
   share in distributions of the company's income, the right to purchase
   new shares issued by the company, and the right to a company's assets
   during a liquidation of the company. However, stockholder's rights to a
   company's assets are subordinate to the rights of the company's
   creditors. This means that stockholders typically receive nothing if a
   company is liquidated after bankruptcy (if the company had had enough
   to pay its creditors, it would not have entered bankruptcy), although a
   stock may have value after a bankruptcy if there is the possibility
   that the debts of the company will be restructured.

   Stockholders or shareholders are considered by some to be a partial
   subset of stakeholders, which may include anyone who has a direct or
   indirect equity interest in the business entity or someone with even a
   non-pecuniary interest in a non-profit organization. Thus it might be
   common to call volunteer contributors to an association stakeholders,
   even though they are not shareholders.

   Although directors and officers of a company are bound by fiduciary
   duties to act in the best interest of the shareholders, the
   shareholders themselves normally do not have such duties towards each
   other.

   However, in a few unusual cases, some courts have been willing to imply
   such a duty between shareholders. For example, in California, majority
   shareholders of closely held corporations have a duty to not destroy
   the value of the shares held by minority shareholders. See Jones v. H.
   F. Ahmanson & Co., 1 Cal. 3d 93 (1969) .

   The largest shareholders (in terms of percentages of companies owned)
   are often mutual funds, and especially passively managed
   exchange-traded funds.

Application

   The owners of a company may want additional capital to invest in new
   projects within the company. They may also simply wish to reduce their
   holding, freeing up capital for their own private use.

   By selling shares they can sell part or all of the company to many
   part-owners. The purchase of one share entitles the owner of that share
   to literally share in the ownership of the company a fraction of the
   decision-making power, and potentially a fraction of the profits, which
   the company may issue as dividends.

   In the common case of a publicly traded corporation, where there may be
   thousands of shareholders, it is impractical to have all of them making
   the daily decisions required to run a company. Thus, the shareholders
   will use their shares as votes in the election of members of the board
   of directors of the company.

   In a typical case, each share constitutes one vote (except in a
   co-operative society where every member gets one vote regardless of the
   number of shares he holds). Corporations may, however, issue different
   classes of shares, which may have different voting rights. Owning the
   majority of the shares allows other shareholders to be out-voted -
   effective control rests with the majority shareholder (or shareholders
   acting in concert). In this way the original owners of the company
   often still have control of the company.

Shareholder rights

   Although ownership of 51% of shares does result in 51% ownership of a
   company, it does not give the shareholder the right to use a company's
   building, equipment, materials, or other property. This is because the
   company is considered a legal person, thus it owns all its assets
   itself. This is important in areas such as insurance, which must be in
   the name of the company and not the main shareholder.

   In most countries, including the United States, boards of directors and
   company managers have a fiduciary responsibility to run the company in
   the interests of its stockholders. Nonetheless, as Martin Whitman
   writes:

          "...it can safely be stated that there does not exist any
          publicly traded company where management works exclusively in
          the best interests of OPMI [Outside Passive Minority Investor]
          stockholders. Instead, there are both "communities of interest"
          and "conflicts of interest" between stockholders (principal) and
          management (agent). This conflict is referred to as the
          principal/agent problem. It would be naive to think that any
          management would forego management compensation, and management
          entrenchment, just because some of these management privileges
          might be perceived as giving rise to a conflict of interest with
          OPMIs." [Whitman, 2004, 5]

   Even though the board of directors runs the company, the shareholder
   has some impact on the company's policy, as the shareholders elect the
   board of directors. Each shareholder typically has a percentage of
   votes equal to the percentage of shares he or she owns. So as long as
   the shareholders agree that the management (agent) are performing
   poorly they can elect a new board of directors which can then hire a
   new management team. In practice, however, genuinely contested board
   elections are rare. Board candidates are usually nominated by insiders
   or by the board of the directors themselves, and a considerable amount
   of stock is held and voted by insiders.

   Owning shares does not mean responsibility for liabilities. If a
   company goes broke and has to default on loans, the shareholders are
   not liable in any way. However, all money obtained by converting assets
   into cash will be used to repay loans and other debts first, so that
   shareholders cannot receive any money unless and until creditors have
   been paid (most often the shareholders end up with nothing).

Means of financing

   Financing a company through the sale of stock in a company is known as
   equity financing. Alternatively, debt financing (for example issuing
   bonds) can be done to avoid giving up shares of ownership of the
   company. Unofficial financing known as trade financing usually provides
   the major part of a company's working capital (day-to-day operational
   needs). Trade financing is provided by vendors and suppliers who sell
   their products to the company at short-term, unsecured credit terms,
   usually 30 days. Equity and debt financing are usually used for
   longer-term investment projects such as investments in a new factory or
   a new foreign market. Customer provided financing exists when a
   customer pays for services before they are delivered, e.g.
   subscriptions and insurance.

Trading

   A stock exchange is an organization that provides a marketplace (either
   physical or virtual) for trading shares, where investors (represented
   by stock brokers) may buy and sell shares in a wide range of companies.
   A given company will usually list its shares by meeting and maintaining
   the listing requirements of a particular stock exchange. In the United
   States, through the inter-market quotation system, stocks listed on one
   exchange can also be bought or sold on several other exchanges,
   including relatively new internet-only exchanges. Stocks are broadly
   grouped into NYSE-listed and NASDAQ-listed stocks and exchanges where
   NYSE-listed stocks may be bought are generally not the same group as
   the exchanges where NASDAQ-listed stocks may be bought. Many large
   foreign companies choose to list on a U.S. exchange as well as an
   exchange in their home country in order to broaden their investor base.
   These shares are called American Depository Receipts (ADRs) -- or, in
   the case of companies such as UBS and Daimler Chrysler -- "foreign
   ordinary shares."

   Large U.S. companies also list in foreign exchanges for the same
   reason. Although it makes sense for some companies to raise capital by
   offering stock on more than one exchange, in today's era of electronic
   trading, there is limited opportunity for private investors to make
   profit on pricing discrepancies between one stock exchange and another.
   As such, arbitrage opportunities disappear quickly due to the efficient
   nature of the market.

Buying

   There are various methods of buying and financing stocks. The most
   common means is through a stock broker. Whether they are a full service
   or discount broker, they arrange the transfer of stock from a seller to
   a buyer. Most trades are actually done through brokers listed with a
   stock exchange, such as the New York Stock Exchange.

   There are many different stock brokers from which to choose, such as
   full service brokers or discount brokers. The full service brokers
   usually charge more per trade, but give investment advice or more
   personal service; the discount brokers offer little or no investment
   advice but charge less for trades. Another type of broker would be a
   bank or credit union that may have a deal set up with either a full
   service or discount broker.

   There are other ways of buying stock besides through a broker. One way
   is directly from the company itself. If at least one share is owned,
   most companies will allow the purchase of shares directly from the
   company through their investor relations departments. However, the
   initial share of stock in the company will have to be obtained through
   a regular stock broker. Another way to buy stock in companies is
   through Direct Public Offerings which are usually sold by the company
   itself. A direct public offering is an initial public offering in which
   the stock is purchased directly from the company, usually without the
   aid of brokers.

   When it comes to financing a purchase of stocks there are two ways:
   purchasing stock with money that is currently in the buyers ownership,
   or by buying stock on margin. Buying stock on margin means buying stock
   with money borrowed against the stocks in the same account. These
   stocks, or collateral, guarantee that the buyer can repay the loan;
   otherwise, the stockbroker has the right to sell the stock (collateral)
   to repay the borrowed money. He can sell if the share price drops below
   the margin requirement, at least 50% of the value of the stocks in the
   account. Buying on margin works the same way as borrowing money to buy
   a car or a house, using the car or house as collateral. Moreover,
   borrowing is not free; the broker usually charges 8-10% interest.

Selling

   Selling stock is procedurally similar to buying stock. Generally, the
   investor wants to buy low and sell high, if not in that order ( short
   selling); although a number of reasons may induce an investor to sell
   at a loss.

   As with buying a stock, there is a transaction fee for the broker's
   efforts in arranging the transfer of stock from a seller to a buyer.
   This fee can be high or low depending on which type of brokerage,
   discount or full service, handles the transaction.

   After the transaction has been made, the seller is then entitled to all
   of the money. An important part of selling is keeping track of the
   earnings. Importantly, on selling the stock, in jurisdictions that have
   them, capital gains taxes will have to be paid on the additional
   proceeds, if any, that are in excess of the cost basis.

Stock price fluctuation

   The price of a stock fluctuates fundamentally due to the theory of
   supply and demand. Like all commodities in the market, the price of a
   stock is directly proportional to the demand. However, there are many
   factors on basis of which the demand for a particular stock may
   increase or decrease. These factors are studied using methods of
   fundamental analysis and technical analysis to predict the changes in
   the stock price.

Technology's influence on trading

   Stock trading has evolved tremendously. Since the very first Initial
   Public Offering (IPO) in the 13th century, owning shares of a company
   has been a very attractive incentive. Even though the origins of stock
   trading go back to the 13th century, the market as we know it today did
   not catch on strongly until the late 1800s.

   Co-production between technology and society has led the push for
   effective and efficient ways of trading. Technology has allowed the
   stock market to grow tremendously, and society has encouraged the
   growth. Within seconds of an order for a stock, the transaction can now
   take place. Most recent advancements with trading have been due to the
   Internet. The Internet has allowed online trading. In contrast to the
   past where only those who could afford expensive stockbrokers, anyone
   who wishes to be active in the stock market can now do so at a very low
   cost per transaction. Trading can even be done through
   Computer-Mediated Communication (CMC) use of mobile devices such as
   handheld computers and cellular phones. These advances in technology
   have made day trading possible.

   Retrieved from " http://en.wikipedia.org/wiki/Stock"
   This reference article is mainly selected from the English Wikipedia
   with only minor checks and changes (see www.wikipedia.org for details
   of authors and sources) and is available under the GNU Free
   Documentation License. See also our Disclaimer.
