Introduction to Stock Market
Investment is one of the key factors for starting a business. Huge sums of money would be required even to start a small business. Business founders always don’t have the entire amount with them. Public stocks help them at these times.
What is a stock?
Stock is the total capital paid or invested in the business by the founders of the company. This is also called as capital stock. The capital stock will be divided into different entities called as shares. Share can be termed as an atomic unit of stock. Stocks don’t fluctuate in quantity and volume unlike other property or assets. Any person can buy shares of a company and the person automatically becomes a fraction of the ownership to that company and the person will be termed as one of the shareholders of that company. Shareholders can be called as fractional owners. But they don’t get full privileges as the actual owner. They don’t have the right to own the company’s equipments and properties related to the company.
A percentage of the company’s profit is given to the shareholder. This profit depends on the number of shares. The higher management of the company decides this percentage. This profit amount is called as dividend. Companies provide options for the shareholders on using the dividend. It can either be got in cash or it can be re-invested into the share so that the person gets additional shares at the current market price. The shares can be sold to other persons also.
Founders of the company contribute a considerable amount to the capital. Only a part of the capital is got in shares. But, the number of shares and the stock price should be published initially before starting the company.
Types of stocks:
Common stock and preferred stock are basically two types of stock. Based on the business’s decision, the common stock holder gets basic voting rights. Preferred stock holders don’t have voting rights. But, they are entitled to get minimum guaranteed dividend. Preferred stock holders are first paid before common stock holder gets dividend.
Equity is a common word, which we hear in the stock market. A claim made over an asset is called as equity. Consider the following example. X starts a business worth 1000 rupees. X can sell out shares for adding an amount of 1000 as 10 shares. If a person owns 2 shares worth 100, then that person will have 10% of equity in that business.
The initial value of each share is called as the par or face value. This value is declared initially when the company enters into the stock market. The founders of the business decide ownership rules and the share values. Shareholders will be given stock certificates when they buy shares. This acts as a proof that the person is a shareholder of the company.
There is certainly an amount of risk involved in stock market. So, before buying stocks, one should have an eye of the market and economic situation.