Stocks for the Novice
How often have you heard people say that trading in stocks is like gambling or more definitively it is gambling? Well, the truth is that it is like gambling. Also keep in mind the fact that there is always a certain amount of risk with any venture you undertake. So the best way to eliminate or minimize risks is to have a basic understanding of what you are doing. So if you wish to trade in stocks, you need to have some basic idea of what a stock is.
What is a stock?
A stock is a share in the ownership of a company. Companies that are expanding usually require large amounts of money to fund their projects, infrastructure and technology. A company, in order to meet its financial requirements, offers to sell its share to the general public. When a company sells its privately held shares to new investors for the first time, it is called an IPO—Initial Public Offering. By offering to sell its shares, the company is said to be going public.
Consider for example that you start a company and issue ten shares. So each share would be worth 10% or one tenth of the company’s ownership. Therefore, if an individual holds one share and buys another, he owns 20% of the company. Here it is important to point out that in normal terminology stock, share or equity mean one and the same thing.
The basic idea that underlies the concept of shares is that the shareholders can make claims to the profits and assets of the company.
The above is but a small example. A company, when it goes public normally issues millions of shares. Therefore, owning a few shares does not mean that you 'own a part of the company' in the sense that you can visit the premises and be a part of its daily functions. Holding a stock only gives you certain rights such as voting to elect the board of directors of the company or owning some assets.
Buying and Holding shares
When you buy the shares of a company, you are issued a certificate that states your ownership of the company. With the advancement of technology investors these days do not get paper certificates like their counterparts did in times gone by. Now most companies issue the certificates online. Your stock ownership, in other words, is, therefore, recorded electronically.
It is important to point out that stocks in most cases are held in what can be termed as a street name. Street name means nothing but the stock held will be in the broker’s name and not in the customer’s name. The logic behind this is that by holding a stock in a street name the ownership can be transferred more easily when it is bought or sold. This procedure saves the investor’s time as they do not have to go down to the broker’s office every time they wish to buy or sell their stock.
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