Did economics hurt your head in grade school? Do you believe that Dow Jones is a person? Well, then you will like my beginner’s course on stocks, a four part article series outlining the very basics of what stocks are all about. Shall we begin?
In essence, the stock of a business represents the original amount of capital that went into founding it. Since a business’ stock can not be withdrawn to the disadvantage of its creditors, it serves as a security to them. When a new company is being created, the stock of this business is divided into shares, and each share will have a particular declared face value that depends on the total amount of money that was invested in the businesses. Shares represent a fraction of ownership in a business, and there may be different types of shares with different ownership rules, privileges or share values.
Generally stock will take the form of shares of common stock or preferred stock. Common stock is a unit of ownership and usually comes with voting rights that can be used in corporate decisions. Preferred stock typically does not come with voting rights but people who own preferred stocks are entitled legally to get a particular level of dividend payments before any dividends can be issued to other shareholders.
The rules and perks of stocks varies however; some shares of common stocks can be issued without usual voting rights, or some shares may have special rights that are unique to them that are given only to specific parties. Preferred stock might have qualities of bonds blended in with common stock voting rights in addition to preference in the payment of dividends over common stock.
Any sort of financial instrument whose value depends on the price of its underlying stock is called a stock derivative. The two main types of stock derivatives are futures and options. Stock futures are contracts where the buyer is long, or when they take on the obligation to buy the stock, and the seller is short, or when they take on the obligation to sell the stock. A stock option is the right to buy stock in the future at a fixed price (a call option) and the right to sell stock in the future at a fixed price (a put option). So, you can see that the value of a stock future and a stock option changes as the value of the stock it is based on changes. To Be Continued In Part 2
Mallory Megan works for Rapid Recovery Solution and writes articles on commercial collection agencies.
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