What is a Stock?

//What is a Stock?
What is a Stock? 2017-10-10T07:44:37+00:00

Definition: A stock certificate is a share of ownership in a company that allows investor participation in the company’s capital. In fact, a stock is a claim to a company’s assets and income and it enables an organization to raise capital funds for investment.

What Does Stock Mean?

What is the definition of stock? The shared capital of each company consists of a certain number of shares with a nominal value. A shareholder can fully participate in the company’s assets, profitability and income based on the laws and regulations running the state that the company is headquartered. Additionally, shareholders have voting rights and participate in the company decision-making.

Stocks are classified into common and preferred. Common shareholders are entitled to profits only if the company distributes its retained earnings, whereas preferred shareholders are entitled to a fixed dividend annually. If the company was liquidated, common shareholders are compensated after loan holders, bondholders and preferred shareholders. On the other hand, preferred shareholders have no voting rights.

Let’s look at an example.

Example

Peter owns 2,000 shares of company X for $12 per share, a total worth of $24,000. In the annual general meeting of company X, the management decides to increase its capital through a new issuance. This means that existing shareholders can participate in the share capital increase by acquiring preemptive rights in proportion to the number of total shares held.

The management decides to issue 4 million new shares for $10 each to raise $40 million. The rights issue is 2 for 1, which means that for every 2 shares Peter owns, he will get another 1, so he has the right to buy 1,000 more shares for $10 each, a total worth of $10,000.

After the rights issue, Peter will own 2,000 shares for $12 per share, $24,000 plus $1,000 new shares for $10, $10,000, a total of $34,000. This means that the average share price after the rights issue, also known as ex-rights price will be $34,000 / 3,000 shares = $11.3 per share.

Summary Definition

Define Stock: A stock is a certificate of ownership in a corporation that gives the owner or stockholder certain rights to assets, future profits, and influence how the company is run and operated.