Definition of a Stock

Definition of stock.

A stock (also referred to as share or equity) is a security issued by a company that represents a stake of the ownership rights in the assets of the company and a share of its profits after payments of corporate liabilities and obligations. Stocks are sold and bought on an exchange. Corporations issue stock in order to raise capital to finance their operations. A stockholder is an owner of a company. A stockholder is an owner of a company’s property, which is held in the name of the company on behalf of its stockholders. Other securities such as bonds and notes differ from stocks, since they are corporate obligations and do not represent an ownership interest in the company.

There are several types of stock but the two most typical are Common and Preferred stock. An owner of common stock is entitled to voting right at stockholder’s meetings and a share of dividend. Generally, preferred stock do not have voting rights, but holders are entitled to priority over holders of common stock should a company go bankrupt and is liquidated. Shares of stock a reflected in written instrument referred to as stock certificates. Each share represents a percentage of ownership in a company.

The value of a share is determined by the value of the issuing company, its profitability, and future prospects. The market price reflects what purchasers are willing to pay depending on their evaluation of the company’s prospects. If a company issues 10000 stocks in total, then each stock represents a 0.01% ownership in the company.

Stock Split

Stock split is done to make shares affordable to those investors who could not afford it due to high prices and to infuse liquidity. Stock split reduces the market price of a stock without any cha...

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... to smaller investors who could not afford it. This reason is psychological in the sense that, as the price of a stock gets higher and higher, average investors will consider the price of the stock to be too high or unaffordable. Splitting the stock will therefore entice new investors who will perceive the stock to be at an attractive price level, even though the value of the stock doesn’t change. Existing shareholders may also have the feeling that they now have more shares than they did before, and if the price of the stock increases in the future, they now have more stock to trade.

Another is that, the liquidity of the stock increases. This means that an investor can easily trade shares for cash when they want to get out of an investment.

Finally, stock splits create a positive image for investors because they believe a company that splits their stock is growing.