Stocks

Stocks, also known as equities or shares, are securities that represent ownership interests in a corporation. A person or institution that owns stock in a company is known as a shareholder. Depending on the class of stock held, shareholders may have voting rights, rights to receive dividends, and claims on the company's residual assets if it is liquidated after its creditors have been paid.^[1]

Companies issue stocks to raise capital for business activities such as expansion, research and development, debt repayment, and acquisitions. Investors purchase stocks primarily to benefit from potential capital appreciation, dividend income, and participation in corporate ownership.

History

The development of stock markets is closely associated with the growth of joint-stock companies, which enabled businesses to raise capital from multiple investors. The Dutch East India Company, established in 1602, is widely associated with the early development of publicly traded company shares and organised securities trading in Amsterdam.

Over subsequent centuries, stock exchanges developed in major financial centres, facilitating the issuance and trading of shares. Modern stock markets operate through electronic trading systems and are subject to regulatory frameworks intended to promote transparency, orderly markets, and investor protection.

Types of stock

Common stock

Common stock represents an ownership interest in a corporation and generally provides shareholders with voting rights on certain corporate matters. Common shareholders may receive dividends when declared by the company's board of directors. Their claims on corporate assets rank behind creditors and preferred shareholders with superior liquidation rights.

Preferred stock

Preferred stock generally provides priority over common stock in the payment of dividends and the distribution of assets during liquidation. Its terms may include fixed dividend provisions, redemption rights, or conversion features. Preferred shareholders often have limited or no ordinary voting rights, although the specific rights depend on the terms of the issue and applicable law.

Classification of stocks

Stocks may be classified according to company size, investment characteristics, sector, or financial performance.

By market capitalisation

Large-cap stocks: Shares of companies with relatively large market capitalisations.
Mid-cap stocks: Shares of companies with intermediate market capitalisations.
Small-cap stocks: Shares of companies with relatively small market capitalisations.
Micro-cap stocks: Shares of companies with very small market capitalisations, which may have limited liquidity and greater price volatility.

The thresholds used for these classifications vary across markets and financial institutions.

By investment characteristics

Growth stocks: Shares of companies expected to increase their earnings or revenue at a relatively high rate.
Value stocks: Shares considered undervalued relative to estimates of their underlying financial or business value.
Income stocks: Shares of companies that distribute a significant portion of their earnings through dividends.
Blue-chip stocks: Shares of established companies with substantial market presence and a record of financial performance.
Cyclical stocks: Shares of companies whose performance is sensitive to changes in economic activity.
Defensive stocks: Shares of companies whose products or services may experience relatively stable demand across economic cycles.

These classifications are not mutually exclusive, and individual stocks may belong to several categories.

Stock markets

A stock market is a system through which shares are issued, bought, and sold. Primary markets facilitate the issuance of new shares by companies, while secondary markets allow investors to trade existing shares.

Stock trading takes place on organised exchanges and, in some jurisdictions, through other regulated trading venues. Prices are determined by supply and demand and may be influenced by company performance, economic conditions, interest rates, investor expectations, and geopolitical developments.

Major stock exchanges include:

Stock valuation

Investors and analysts use financial and market indicators to assess the value of stocks.

Common valuation measures include:

Market capitalisation: The market price per share multiplied by the number of outstanding shares.
Price-to-earnings ratio: The share price divided by earnings per share.
Earnings per share: A company's earnings attributable to ordinary shareholders divided by the relevant number of shares.
Dividend yield: Annual dividends per share expressed as a percentage of the market price per share.
Price-to-book ratio: The market price per share divided by the book value per share.

These measures are used alongside financial statements, business prospects, industry conditions, and other information. No single indicator determines the fair value of a stock.

Returns from stocks

Investors may earn returns from stocks through capital appreciation and dividends.

Capital appreciation occurs when a stock's market price rises above its purchase price. Dividend income arises when a company distributes a portion of its earnings or other permitted funds to shareholders.

Stock returns are uncertain. A company may reduce or discontinue dividends, and its share price may decline substantially. Investors can lose some or all of their invested capital.

Risks

Stock investments are subject to several risks:

Market risk: Share prices may decline because of broader market or economic developments.
Business risk: Poor operating performance, competition, or strategic failures may reduce a company's value.
Liquidity risk: Some stocks may be difficult to sell quickly at a desired price.
Concentration risk: Holding a limited number of stocks may expose an investor to company-specific or sector-specific losses.
Regulatory risk: Changes in laws, regulations, or government policies may affect business performance.
Corporate governance risk: Mismanagement, conflicts of interest, or financial misconduct may harm shareholders.

Diversification across companies, sectors, and asset classes can reduce certain risks but cannot eliminate investment losses.

Stock ownership and corporate rights

Shareholders' rights depend on the class of shares, the company's governing documents, and applicable law. These rights may include voting on directors and specified corporate matters, receiving declared dividends, participating in certain corporate actions, and obtaining information disclosed to shareholders.

Shareholders do not ordinarily own the corporation's individual assets directly. The corporation is a separate legal entity that owns its assets and is responsible for its liabilities.