Stocks and Shares



Stocks and shares:

1. Introduction and definition

2. Kinds of stock

3. Stock holder

4. Blue chip stock

5. Depository receipt

6. Issued shares

7. Stock option

8. Stock broker

9. Stock market

10. Share capital

11. Stock valuation



Stocks are one of the most profitable investment avenues in the world. Historically, they have stood the test of time as the preferred investment option. Stock trading is speculative business and entails an element of risk.

Stock is a type of security that gives the stock holder ownership in a corporation and also a claim on part of the corporations assets and earnings. Stocks are also known as equity or shares in the UK and India. Nearly every investor invests in stocks and stocks have by far given greater returns than most other investments in the long run.

While stocks and shares lure a large number of prospective investors, not everyone, especially the new comers are familiar with the different aspects and terms of this line of investment. Some terms which are commonly used and referred to in the areas of stocks and shares, have been discussed here in an effort to familiarize the reader



Stocks are of two kinds Common and Preferred. A common stock holder usually has the right to vote at share holder meetings and to receive dividends that the company has declared. A preferred stock holder does not generally have voting rights, but his claim on the companys assets and earnings are greater than that of the common stock holder. For example, preferred stock holders receive dividends before common stock holders and have priority over the liquidation proceeds if a company is declared bankrupt.



A holder of stock, also known as a share holder, has a claim on the corporations assets and earnings. In other words a share holder has an ownership of a corporation. Ownership is calculated by the number of shares a person owns in proportion to the number of outstanding shares. For example, if a company has a hundred shares of stock outstanding and one person owns ten shares, that person would own and have claim to ten percent of the companys assets.



Blue chip stock is share from a very well established and financially stable company that has demonstrated its ability time and again to pay dividends in both good and bad times. The name blue chip is coined from the game of poker, where the blue chips are the most expensive ones. These stocks are usually less risky than other stocks.



Depository receipt is a negotiable instrument issued by a bank to represent a foreign companys publicly traded shares. Depository receipts facilitate purchase of shares in foreign companies, because the company doesnt have to leave its shores. American banks issue American Depository Receipts (ADR), European banks issue European Depository Receipts (EDR) and other banks issue Global Depository Receipts (GDR).



The amount of shares that are sold to investors and held by them and are also known as issued stocks and include the stocks which are sold publicly by a company in order to generate capital.



This is a privilege sold by one party to another. The buyer thereby gets the right or option, but not the obligation to buy or sell a stock at an agreed upon price during a certain time.



A stock broker is an individual or a firm that charges a fee or commission for executing buy and sells orders submitted by an investor. Earlier only the wealthy could afford a broker and access the stock market. With the advent of the internet, there has been a spate of discount brokers who charge a nominal fee but do not provide personalized services. Now, almost anybody can invest in the market because of investment brokers. Normally, all stock transactions except initial public offerings (IPOs) have to be conducted through a stock broker.



The market in which shares are issued or traded either through stock exchanges or over the counter is known as a stock market. It is known as share market in the UK and in India and also as equity market. It is one of the most important areas of a market economy as it provides companies access to capital through sale of shares. It also provides investors with a part ownership in the company. Share holders can reap the potential gains if the company performs well in the future. The stock market can be divided into two main parts; the primary and the secondary market. The primary market is where the new issues are initially offered. Subsequent trading goes on in the secondary market.



Share capital or equity financing is the portion of a corporations equity raised through issue of shares. Initial Public Issue or IPO is the most common method of issue of share in the primary market where investors can subscribe to purchase shares of that company.



There are different methods by which a company and its stock are valued. One method, termed Fundamental criteria (fair value) involving discounted cash flow method is financially the soundest method. The other method is Market criteria (potential price) where the potential price range of a stock is also determined in addition to its fair value.


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