In simple words, a share or stock is a document issued by a company, which entitles its holder to be one of the owners of the company. A share is issued by a company or can be purchased from the stock market.
By owning a share you can earn a portion and selling shares you get capital gain. So, your return is the dividend plus the capital gain. However, you also run a risk of making a capital loss if you have sold the share at a price below your buying price.
A company’s stock price reflects what investors think about the stock, not necessarily what the company is ‘worth.’ For example, companies that are growing quickly often trade at a higher price than the company might currently be ‘worth.’ Stock prices are also affected by all forms of company and market news. Publicly traded companies are required to report quarterly on their financial status and earnings. Market forces and general investor opinions can also affect share price.
Owning a stock or a share means you are a partial owner of the company, and you get voting rights in certain company issues.
Over the long run, stocks have historically averaged about 10% annual returns However, stocks offer no guarantee of any returns and can lose value, even in the long run.
Investments in stocks can generate returns through dividends, even if the price falls.
A unique aspect of a publicly held company (a company in which the stock is traded on public markets) is that ownership and management of the company are separated. Management, as an agent for the stockholders, is responsible for maximizing the stockholders’ share value through the firm’s growth and profitability. Yet, one might ask, who is really serving the interests of the stockholders? Management decides everything from the direction of the company to the compensation of the top executives.
How does the shareholder have any voice in the process? The board of directors acts as the voice of the shareholders and conducts meetings to ensure that the interests of the shareholders are being met. Shareholders usually have the right to elect board members. Each shareholder is entitled to his or her proportionate share of all the earnings—or the profits—generated by the company. This is where the stock gets its true value. As a shareholder in that firm, you are entitled to a proportional share of this and all future years’ earnings (after paying interest to the bondholders). However, these earnings may or may not be distributed to shareholders as dividends. Periodically, the board convenes to decide how much of the earnings will be paid to shareholders as dividends and how much will be retained by the company to finance future growth. This is a critical decision that reflects a careful balancing act between the present cash needs of the shareholders and the future potential of the company.
One of the advantages of owning stock is the ease of trading it. After glancing at the newspaper, you can call a broker or connect to an electronic trading account on the Internet, and instantly buy or sell most stocks listed on the organized exchanges. Note, however, that you are not buying stock from the company, but from another owner of the shares who has decided to sell. When a company first brings its shares to the market, this is an initial public offering (IPO), or ‘new issue.’ Immediately after the initial public offering, shares begin trading on the exchanges as investors call their brokers to buy or sell.
MAKING MONEY IN THE MARKET
The value of a company, and hence a share of its stock, is equivalent to today’s assessment of the value of all future earnings paid out by that company. The stock market is an auction where prospective buyers of stock, represented by brokers, meet with the sellers of stock, represented by other brokers, to agree on the price. If a company were to announce a major advancement, one that could double the earnings of the company in the future, a seller of stock would certainly expect a higher price than before the announcement. The buyer, on the other hand, would be willing to pay a higher price. Thus, we would expect to see the price of a share of stock climb immediately after a major announcement of this sort. Conversely, if a company announces bad news, we would expect the stock price to fall.
So, the fundamental cause for stock price fluctuations is the changing projection of future earnings. In addition, all things being equal, falling interest rates cause stock prices to go up, and rising interest rates cause stock prices to fall.
Every transaction in the stock exchange is carried out through licensed members called brokers.
To trade in shares, you have to approach a broker However, since most stock exchange brokers deal in very high volumes, they generally do not entertain small investors. These brokers have a network of sub-brokers who provide them with orders.
The general investors should identify a sub-broker for regular trading in shares and place his order for purchase and sale through the sub-broker. The sub-broker will transmit the order to his broker who will then execute it.
Shares in which there are frequent and day-to-day dealings, as distinguished from partly active shares in which dealings are not so frequent. Most shares of leading companies would be active, particularly those which are sensitive to economic and political events and are, therefore, subject to sudden price movements. Some market analysts would define active shares as those which are bought and sold at least three times a week. Easy to buy or sell.
