Stock Market- Basic Concepts

To acquire a clear and concise understanding of the stock market, it always helps to have an in-depth knowledge of its basic concepts. Before we move on to understand what a stock market is, let us examine the meaning of the word, 'stock.' In economic terms, a stock is the smallest unit of ownership that a corporation offers to willing investors. If an investor owns a portion of the company, he/she shares the ownership of the company with other shareholders.

Shareholders don’t just share part of the company, they also have a say in important matters of the company; for example, the right to vote for the members of the board of directors. A shareholder also has the right to demand the company’s annual reports whenever he/she desires.

A company cannot take a shareholder for granted. Most of the profits that the company makes need to be distributed fairly among its shareholders. There are many reasons why a company feels the need to sell out shares into the market. It could be a need to extend the business and recruit new staff or to introduce a new product in the market. Whatever the reasons for a corporation to go public, the shareholders play a vital role in determining its future market position.

The concept of limited liability is one singular property of stock ownership. This feature implies that in case the company loses out on a lawsuit and arrives at a position wherein it has to pay up a significant judgment, the shareholders will not be affected so drastically. The worst that can happen to the shareholder is the price of the stock becoming valueless. In such cases, creditors do not normally come to seize the personal assets of shareholders. However this market behavior is not always consistent, particularly in case of privately owned companies.

There are mainly two kinds of stocks- common stock and preferred stock.

When we say common stock, we mean the major bulk of stock owned by the public. This category of stock allows the stockholders to vote and the power to acquire dividends. Dividends are part of the profits of a company that are shared by the shareholders and are usually given out on a quarterly basis. It is the common stock that usually determines the mood of the stock market- whenever you read or hear of the market going 'up' or 'down,' it is always about common stock.

Preferred stock differs from common stock through one significant property- preferred stockholders get higher dividends compared to common stockholders. However as the name suggests, preferred stock does not have too many advantages other than high dividends. Yet there are many investors who are willing to place their confidence on preferred stock for the sake of consistent dividends. If you are planning to go for preferred stock, always make sure to choose reliable companies that are known to generate substantial profits. This will ensure you of a good and constant flow of worthwhile dividends from the company.