Stocks, also called shares or equities, are certificates of company ownership typically purchased by investors and traders on secondary markets called exchanges. Stocks are also bought and traded as bundled investments, called funds, and as derivatives like futures and options, and occasionally re-purchased by their issuer.
Types of Stocks
Common stock (aka "ordinary shares") is the kind of stock American investors and media are usually talking about - one share means one part-ownership of a company, a claim on part of its profits and a vote to elect board members. Common stock in the U.S. occasionally pays an annual dividend but the issuer can choose whether and how much to pay. Dividends are more likely to be paid by European stock issuers.
Preferred stocks, by contrast, usually pay a guaranteed dividend for the life of the issuer, and their holders get better treatment than common stockholders if the issuer declares bankruptcy. However, preferred stocks can also be repurchased - usually above market value - by the issuer at any time. Some investors consider preferred shares a midpoint in securities risk between bonds and common stock .
Some corporations issue different classes of stocks to separate groups of shareholders to give them greater or lesser voting powers. Such corporations in the U.S. typically issue class A and class B shares and give significantly greater voting rights to class A shares. A corporation's first public sale of its shares is called an initial public offering (IPO)
Stock Investors and Traders
Stocks are companies' main form of equity financing - raising capital by offering share-buyers a stake in its future growth but with no guarantees of success. For debt financing, companies typically issues bonds that it must repay with annual interest.
Common stock value rises and falls with the issuer's fortunes and stockholders face the risk of losing their entire investment, unlike those holding the company's bonds. Nonetheless, stock volumes continue to grow worldwide because they offer unlimited returns if the company succeeds, outweighing the downside risks of failure.
Historically, stocks as investments have returned about twice that of bonds and other fixed income investments. Stock investors naturally have a greater appetite for risk than bond investors, since stocks carry no guarantee of annual return or of even maintaining their face value. Younger investors in retirement plans, for example, typically have a portfolio weighted to stocks over bonds.
New Stock Marketplaces
The expansion of the Internet during the late 1990s shifted the focus of trading from telephone-based stock-brokers to computer-based independent and so-called day traders. Although faster-paced trading has shifted from volatile technology-stock IPO to more liquid derivatives markets, increasing volumes are traded online and Internet platforms have grown significantly. Recent research shows trading volume growth on the all-electronic NASDAQ exchange clearly outpacing that on the New York Stock Exchange and the American Stock Exchange in both stock numbers and in dollar values.
- Stock basics: Different types of stocks. Investopedia.com.
- Recent Growth in Nasdaq Trading Volume and Its Relation to Market Volatility. Social Science Research Network.