The stock also capital stock of a corporation is constituted of the equity stock of its owners. A single share of the stock represents fractional ownership of the corporation in proportion to the total number of shares. In liquidation, the stock represents the residual assets of the company that would be due to stockholders after discharge of all senior claims such as secured and unsecured debt.
Stockholders' equity cannot be withdrawn from the company in a way that is intended to be detrimental to the company's creditors. The shares together form stock. The stock of a corporation is partitioned into shares , the total of which are stated at the time of business formation.
Additional shares may subsequently be authorized by the existing shareholders and issued by the company. In some jurisdictions, each share of stock has a certain declared par value , which is a nominal accounting value used to represent the equity on the balance sheet of the corporation. In other jurisdictions, however, shares of stock may be issued without associated par value. Shares represent a fraction of ownership in a business.
A business may declare different types or classes of shares, each having distinctive ownership rules, privileges, or share values. Ownership of shares may be documented by issuance of a stock certificate. A stock certificate is a legal document that specifies the number of shares owned by the shareholder , and other specifics of the shares, such as the par value, if any, or the class of the shares. In the United Kingdom , Republic of Ireland , South Africa , and Australia , stock can also refer to completely different financial instruments such as government bonds or, less commonly, to all kinds of marketable securities.
Stock typically takes the form of shares of either common stock or preferred stock. As a unit of ownership, common stock typically carries voting rights that can be exercised in corporate decisions. Preferred stock differs from common stock in that it typically does not carry voting rights but is legally entitled to receive a certain level of dividend payments before any dividends can be issued to other shareholders.
Shares of such stock are called "convertible preferred shares" or "convertible preference shares" in the UK. New equity issue may have specific legal clauses attached that differentiate them from previous issues of the issuer. Some shares of common stock may be issued without the typical voting rights, for instance, or some shares may have special rights unique to them and issued only to certain parties.
Often, new issues that have not been registered with a securities governing body may be restricted from resale for certain periods of time. Preferred stock may be hybrid by having the qualities of bonds of fixed returns and common stock voting rights. They also have preference in the payment of dividends over common stock and also have been given preference at the time of liquidation over common stock.
They have other features of accumulation in dividend. In addition, preferred stock usually comes with a letter designation at the end of the security; for example, Berkshire-Hathaway Class "B" shares sell under stock ticker BRK.
This extra letter does not mean that any exclusive rights exist for the shareholders but it does let investors know that the shares are considered for such, however, these rights or privileges may change based on the decisions made by the underlying company. Selling Restricted and Control Securities. Investors either purchase or take ownership of these securities through private sales or other means such as via ESOPs or in exchange for seed money from the issuing company as in the case with Restricted Securities or from an affiliate of the issuer as in the case with Control Securities.
Investors wishing to sell these securities are subject to different rules than those selling traditional common or preferred stock. These individuals will only be allowed to liquidate their securities after meeting the specific conditions set forth by SEC Rule A stock derivative is any financial instrument 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. Stock futures are contracts where the buyer is long , i. Stock index futures are generally delivered 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. During the Roman Republic, the state contracted leased out many of its services to private companies. These government contractors were called publicani , or societas publicanorum as individual company.
They issued shares called partes for large cooperatives and particulae which were small shares that acted like today's over-the-counter shares. The earliest recognized joint-stock company in modern times was the English later British East India Company , one of the most famous joint-stock companies.
It was granted an English Royal Charter by Elizabeth I on December 31, , with the intention of favouring trade privileges in India.
Soon afterwards, in ,  the Dutch East India Company issued the first shares that were made tradeable on the Amsterdam Stock Exchange , an invention that enhanced the ability of joint-stock companies to attract capital from investors as they now easily could dispose of their shares. Between and it traded 2. 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. Economic historians [ who?
Edward Stringham also noted that the uses of practices such as short selling continued to occur during this time despite the government passing laws against it. This is unusual because it shows individual parties fulfilling contracts that were not legally enforceable and where the parties involved could incur a loss.
Stringham argues that this shows that contracts can be created and enforced without state sanction or, in this case, in spite of laws to the contrary. 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.
Both private and public traded companies have shareholders. Shareholders are granted special privileges depending on the class of stock, including the right to vote 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, shareholder's rights to a company's assets are subordinate to the rights of the company's creditors. Shareholders are a one type 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 , USA , majority shareholders of closely held corporations have a duty not to destroy the value of the shares held by minority shareholders. The largest shareholders in terms of percentages of companies owned are often mutual funds, and, especially, passively managed exchange-traded funds.
The owners of a private 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. They can achieve these goals by selling shares in the company to the general public, through a sale on a stock exchange.
This process is called an initial public offering , or IPO. 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.
The owner may also inherit debt and even litigation. 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. 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. 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, 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:. 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 select 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 or 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 often the shareholders end up with nothing. 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.
In general, the shares of a company may be transferred from shareholders to other parties by sale or other mechanisms, unless prohibited. Most jurisdictions have established laws and regulations governing such transfers, particularly if the issuer is a publicly traded entity.
The desire of stockholders to trade their shares has led to the establishment of stock exchanges , organizations which provide marketplaces for trading shares and other derivatives and financial products. Today, stock traders are usually represented by a stockbroker who buys and sells shares of a wide range of companies on such exchanges. A company may list its shares on an exchange by meeting and maintaining the listing requirements of a particular stock exchange.
In the United States, through the intermarket trading system, stocks listed on one exchange can often also be traded on other participating exchanges, including electronic communication networks ECNs , such as Archipelago or Instinet. S companies choose to list on a U. These companies must maintain a block of shares at a bank in the US, typically a certain percentage of their capital.More...