Stocks, the subject of so many movies, books, tv shows, conferences, and everything else. Almost certainly, you’re broadly familiar with stocks. However, with such complicated investment instruments, you might not know the insides and outs of what these investment vehicles are. Of course, we won’t be able to tell you every single detail regarding stocks and investing. At least not in this short article. However, we can make sure that you walk away with a basic understanding of what stocks are.
You’ve probably heard people toss around the term “stock” often enough, and likely realize that it’s a type of financial investment vehicle. The basic principle is simple enough, people buy stocks with the hope that their value appreciates over time. But what exactly is a stock?
Owning a stock means you own a portion of the the company listed on the stock certificate. Usually, the portion of the company you own with a single stock is very tiny, most often far, far less than 1 percent. Regardless, when you own a stock, you own a part of the company. While most investors are very small, wealthy people and rich institutions, such as hedge funds, often buy large portions of the company by buying lots and lots of stocks.
How Stock Value is Determined
So how is the value of a stock determined? Basically, the value of a company determines the value of a stock. A company’s total value is often considered to be its “market cap”, or the total value of all outstanding stocks. If a company issues 1 million stocks and each stock is worth $10 dollars, then its market cap is $10 million dollars.
Many things can have an impact on the total value of a company. In general, however, it is a reflection of the company’s performance. Some companies have been doing very well in recent years. Apple Inc., for example, has emerged as a highly profitable company, selling millions of electronic products, such as iPhones, and producing billions upon billions in profits. As a result, the company’s stock value has climbed over the years.
Only a decade ago, you could easily buy Apple’s stock for less than $50 dollars and the total market cap of the company was worth less than $10 billion dollars. Now? Singles shares can cost more than $500 dollars a piece and the company has a market cap in access of $500 billion dollars. Of course, given that the company produced a profit of over $60 billion dollars in 2013 and has a very healthy balance sheet, this value shouldn’t be surprising.
Sometimes stock owners receive a small slice of the company’s profits, which is called a dividend. Companies pay dividends on a per stock basis. So if you own 100 stocks in Apple Inc. and they decide to give a $1 dollar dividend, you will receive $100 dollars.
Stocks and Corporate Governance
When you own a stock, you are often entitled to “vote” on who should be on the board of directors. However, there are different classes of stocks. Some of them don’t come with voting rights. Either way, unless you happen to own a large portion of the company’s stock, your say in the matter will likely be quite limited.
Those rich people and organizations who also buy stock, however, can have a lot of clout on the company’s board of directors, which in turn is responsible for helping to direct the highest level activities of a company. This can mean hiring a CEO, negotiating deals with other companies, and other such matters.
So while your individual piece of the ownership pie may be very small, the importance of stocks in determining control of the company is essential. Those organizations that own the most stock generally have the most voice. Indeed, if a company or person is able to purchase 100% of the stock, s/he will completely control the company.
Hope this helps!