Bottom line, a Stock, also known as Equity, is simply, a security, a proof of fractional ownership of a company that issued the Stock. In simpler English, owning or buying a Stock, means that you, the buyer owns a fraction of the company represented by the number of shares you own. This entitles you to the owner of those shares to receive a share of the profits, if the company makes any. It also means that, if the company fails, you also lose the money you used to buy those shares. One unit of a company’s stock is called a “Share”. So, when you hear people say they own shares of “XYZ company”, it means they own that company stock that equals to the number of shares they bought.
How are stocks created?
Stocks are created by companies that want to raise money from the public. By selling these shares to the public, they are then required to make their financial data public. Shareholders can then request copies for review to determine if they should invest in the company.
Here is a simple example. Suppose you start a business. When you initially start your business, it is Privately owned. Suppose in the first year, your new business made $5000. You then realize that if you had money to expand, you could make $100,000. As a private company, only you bear the cost of running your business, and also keep the profits. So, instead of bearing all the risks, you decide to take your company Public. Based on your analysis, you decide, with inputs from an accounting firm, that the value of your company including, profits, land, building, etc, is $500,000.
You could then issue shares for people to buy. To keep our example simple, you decide to create 500,000 Shares. This puts the value of the Shares at $1.00 per share. This does not mean; the shares will trade at $1.00. They could trade higher or lower. Suppose investors believe the company is undervalued, they could offer to buy the shares at $5.00 per share, giving your company a market valuation of $2.5 Millions! This new value of your company is known as the Market Cap, short for Market Capitalization. This value goes up and down, depending on the value of your company stock.
• A stock is a “receipt”, proof of ownership (fractional) in a company.
• Stocks are also known as Equity in a company.
• A single stock is called a Share.
• Stocks are created by companies that want to raise money from the public.
• The Market Cap, short for Market Capitalization of a company is simply, the number of outstanding Shares multiplied by the Price of each Share.
• The profits you get are based on the number of Shares you own, and so are your loses too.