We live in a world where investing and trading is more mainstream than ever, being such a mainstream thing does not mean everyone knows what a stock is, What is the meaning of shares, how it works, and overall what is a stock.
In this article, you will learn all that and more. 

Where did stocks even come from?

The first stock in the world was introduced way before you probably thought, Wayyy back in 1602 by the Dutch East India Company (Verenigde Oost-Indische Compagnie, VOC).

How it happened was pretty simple, The VOC at its core was a company that was trading spices and other commodities mainly from Asia to Europe shortly after its founding decided to hold the First in history IPO(initial public Offering) and give the owners of it’s shares the ability to actively exchange shares of VOC between themselves and in a sense created the first Stock Exchange in the process!

Enough With the History Lesson, What are stocks in the present day?

In general, Stocks are Securities that represent partial ownership of a corporation and are also referred to as Equity.
While representing ownership of a corporation it also entitles the owner of this stock to the profits and assets of that corporation
compared to the amount of stock that the owner has, Units of Stocks are called “Shares”.

Let me give you a simple Example 

Jimmy, Carl, David, And Carol decided to open a company, Each holds 25% of the company’s shares.

Let’s say the company has 1000 shares which give each 250 shares, And the company is worth $10,000.

The company generates out of its operations $100 a month, what they can do is either take $25 each every month (that’s what they are entitled to due to the ownership of their shares) into their pockets, or they can choose to reinvest these funds back into the company to assist and boost growth in various ways.

Even if only Jimmy and Carol decide to put $25 back into the company every month while Carl and David decide to pocket their money the share amount does not change, If later in the future their company will be worth $20,000 the 25% each holds will be worth more for each shareholder regardless of their contribution.

And now let’s look at how it works in the real world

The main reason stocks exist, to begin with, is for the company that issues these shares to be able to raise capital from the public without the need to go into debt by borrowing money, and here are a few other reasons which I will mention in a moment.

There are 2 main types of companies, the one from the example above is a private company, which means it’s privately owned by 4 individuals, and these individuals can choose to sell their share of the company to anyone they wish, for instance, David can choose to sell his shares to Jimmy if he wants to if he needs the cash or any other reason and in the process will give jimmy a bigger share of the pie. Or he can choose to sell his share to anyone else, split the share of the company to 3 different people, and sell them from his 25%, one will get 10% the other 7% and the last one 8%, And so on, You get the idea, he can also choose how much to sell it for.

On the other hand, we have Public companies

The process of producing shares and handling them is similar for public companies but the main difference is that companies that are public sell their shares on a Stock Exchange as well, and also are under different and much tighter regulations and rules. Stock owners here do not own the corporation, they own shares issued by the corporation, this is an important point because shareholders own the shares not the property of the corporation, and actually, it’s the liability of the shareholders is separated from the corporation and in that sense, if the corporation goes bankrupt the assets of the corporation may be ordered to be sold but the shareholder’s assets are not at risk. Furthermore, the shareholder will not be forced to sell his shares but the value of these shares would have probably fallen severely. and it works the other way around as well, if a corporation large shareholder goes bankrupt he can’t sell the corporation’s assets to pay off his debt.

So as you probably understood, a corporation is looked at as a separate entity from the shareholders, it can have its assets like investments, property, offices, equipment, etc. so there’s a clear separation of ownership and control, in that sense, if you own 20% of a company, even if it’s public, you are not entitled to the 20% of the companies assets, you are entitled to 100% of one-fifth of the companies shares.

So what rights do you have as a Stock/Shareholder?

• Ability to vote on important company decisions
• Having the ability to turn your shares into cash by selling them at any time you please
• Owning a part of a business without your need to start and build that business
• Prospect of growth in the value of your shares and therefore growing your capital
• Some companies pay out dividends so you might have a passive income from owning these shares
• Access to annual shareholder meetings
• And more.

On the other hand, there are also some extra benefits for a company to selling its shares

• The liquidity of investors is enhanced since they can actively sell their shares on the open market exchange
• Lower cost of capital compared to debt financings
• Raising a lot of capital fast and without having related costs to borrowing capital.
• Easier to attract talented workers since working for a public company can have a lot of benefits such as stock options and more
• Better navigation position with vendors
• Possibly better preception with the public and prospective customers since being a public company enhances overall perception in the public eye
• And more

And of course some obligations as well

• Complete transparency, once a company goes public it must release annual, quarterly, and other reports to the public
• A lot more rules and regulations the company must follow once becoming public
• And more

There are 2 Main Types of Stocks

Common And Preferred Stock

Common stock is the most common one and it entitles the shareholder to voting rights and Dividend payouts(if a company gives Dividends) while Preferred stock does not usually have any voting rights it does have a higher priority over dividends and they usually get paid before the common shareholders and on some occasions also getting paid more dividend than then common share, and in an event, the company goes bankrupt or liquidated they have priority over the companies assets.

Issuing Shares

A company can choose to issue more shares for a few reasons and the main one is to raise additional capital, while on the other hand the process usually dilutes the existing shareholder’s ownership rights.

A Corporation can also choose to do something referred to as a stock split, Or a reverse stock split, in this case of a stock split what happens is that there are more shares introduced to the market to lower the existing price per share, usually, this is done to lower the cost per share and make it more accessible to the general public when it becomes too expensive to buy per share while in the process it does not hurt existing shareholders holdings, Let me give you a quick example –

Let’s say we have company A and this companies price per share is $1,000 per share, you have 10 Shares of company A valued at a total of $10,000 if company A decides to do a stock split of 10 this will lower the price per share to $100 per share, but you own 10 shares will instead have 100 shares to your name valued each at $100 instead of $1,000 per share, which will still be worth a total of $10,000.

The opposite can happen as well, A reverse stock split does the opposite action, by decreasing the number of shares while increasing the value per share.

Bottom Line

Stocks are partial ownership of a corporation, they can be bought or sold, and usually, people buy shares of companies in the hope this company will grow and succeed and they will be able to increase their fortunes by holding and at some point in the future selling these shares for a higher price than they originally bought them, We live in crazy times when people invest in companies on a whim or by simply hearing someone recommend them to invest in these companies, it’s important to remember that when you choose to invest your hard-earned money on a company that you understand why this company will grow or at least believe in the idea behind this company and what it represents.

So now that you understand what is the meaning of shares If you feel that investing in stocks is for you and you want to learn more about it, make sure to check out our online courses and learn more about how to invest trade, and more you can click here to start your quest