Buying and selling shares of stock is at the root of American capitalism, the mechanism by which great companies have been built ever since the New York Stock Exchange was created way back in 1789. But what’s truly great about the American stock market is that anyone, not just the rich and privileged, can participate.
Let’s start at the beginning. A stock isn’t some abstract concept. A stock represents a single share of ownership in a company. When you own a stock, you’re actually a part owner of a corporation, with all the rights and responsibilities that come along with that. As a shareholder, you have a say in how the company operates – though if the company has issued millions or even billions of shares, your 10 or 100 shares might not make you the most influential shareholder!
Companies issue stock in the first place so that they can raise capital to run their business. A corporation sells off shares to outside investors in organized fashion in a public offering; the first of which is its initial public offering (or IPO).
The company can issue common stock or preferred stock.
- Common stock represents a simple share of ownership; if the company were to go bankrupt, it would have no financial liability to common shareholders, so those shares would likely become worthless.
- Preferred shares, on the other hand, get some special perks, which might include higher dividends or a larger vote in running the company. Preferred shares aren’t as common as common stock, so you might never own preferred stock in your portfolio.
Shares of stock are traditionally represented by a piece of paper – a stock certificate. Increasingly, though, shares of stock trade hands electronically, so if you invest with a brokerage firm like ShareBuilder you may never actually see a physical certificate for the shares that you own.
The brokerage holds the shares on your behalf in what is known as in street name, which is nothing more than a method of bookkeeping and has no affect whatsoever on your ownership of the stock. It does take away the pleasure of holding onto a beautifully engraved piece of paper that represents your ownership in a company, but owning shares in street name is much more efficient and convenient, especially when it comes time to sell.
When you invest in a public offering, you buy shares directly from the company (with the hope that the company will become even more successful, thus causing the price of its shares to increase). After the company’s IPO, investors are free to sell their shares, and to buy more, but not from the company directly. Instead, shares are traded on organized stock markets like the New York Stock Exchange and Nasdaq. The company itself receives no cash for shares that are sold in these secondary markets, but it’s not that they don’t care. Every corporation wants to see its stock price increase for the benefit of shareholders.
Stocks serve an important purpose in American business, but they might be even more important to you personally. Stocks can be a great vehicle for building personal wealth, so don’t be shy about turning into a full-blown capitalist.