Stocks and Shares



Shares and stocks are two words that are used quite frequently these days. People all around the globe seek them as a way to earn easy money. However, if they can give rise to huge amount of profit on one hand then on other hand one can also face a huge amount of loss. Therefore, stocks and shares can be termed as quite a risky preposition. More often people talk about stocks without knowing what it exactly stands for.

The technical definition of a stock is it is the capital raised by the corporation through the issuance and distribution of shares. The people who hold these stocks, be it a single share, are termed as shareholders. The aggregate or the total value of the stocks issued by the corporation is termed as its market capitalization. However, in some countries such as United Kingdom the stock is used in different sense. The term stock basically refers to bond or more widely to all kinds of market securities in these countries.


The history of stocks and shares can be traced back to the year 1602. In this year the Dutch East India Company became the first company to issue shares of stock. In the middle Ages, the concept of joint ownership came into picture that lead to a tremendous amount of economic growth in Europe. Netherlands used this technique, which in simple terms can be termed as pooling of capital, to finance the building of ships. This made them a maritime superpower. Before the concept of joint-stock Corporation, any expensive venture was only feasible for government or other very rich individuals.


Stocks can be broadly classified into three categories. These are:


Preferred Stocks: These are sometimes also termed as preferred shares. These stocks hold a priority over common stocks in the distribution of dividends and assets. When we talk about preferred stocks in general, they do not provide any voting right in the decision matters of the corporate. However, there are also some preferred shares that provide special voting rights but only in case of some extraordinary event, issuance of new shares being one of them, or in the case of election of directors.


Dual Class Stock: These are quite common form of stocks. In technical terms these are shares issued for a single company with varying classes. These different classes indicate different rights on voting and dividend payments. Each kind of share can only be issued to particular category of shareholders entitling different rights.


Treasury Stocks: In some cases the companies have to buy their shares back from the public. These shares bought back from the public are termed as the treasury stocks. One important point in regard to treasury stocks is that they are considered issued, but not outstanding.

Stock derivative is another common word that is used quite frequently. Any financial claim whose value is dependent on the price of the underlying stock is termed as a stock derivative. There are basically two kinds of stock derivatives across the globe and these are: futures and options. The underlying security may be a stock index or an individual firms stock. In stock futures there are buyers or long and sellers or short. These are basically contracts where the buyer takes on the obligation to buy on the contract maturity date and the seller takes on the obligation to sell. Stock index futures are a bit different from the usual stocks since they are not delivered in the usual manner but by cash settlement.


A stock option, as the name suggests is a kind of option. There are call options in which the buyer has the right but is not obligated to buy stock in the future at a fixed price. Apart from call options there are put options in which the seller has the right but is not obligated to sell stock in the future at a fixed price. From the above discussion it is clear that the value of the stock option changes in reaction to the underlying stock of which it is a derivative. There are various methods for valuing stock options but the most popular one is the Black Scholes model. Stock options are generally transferable, call option being the possible exception.


Shareholders can be broadly classified into two categories: individual or company. The companies that are listed at the stock market aims at enhancing shareholder value. Shareholders are also granted some special privileges which basically depend on the class of stock. The most important of these rights is the right to companys assets during a liquidation of the company. However, this right can not be termed as absolute since it is subordinate to the rights of companys creditors. In simple words it means that the shareholders would not receive anything if the company is liquidated after bankruptcy. But it does not mean that the stock of the company will loose its value. The stock may have a value after bankruptcy but only in the case where there is some probability that the dents of the company will be restructured. The largest shareholders when we talk about the percentage of the company owned are more often than not mutual funds and also exchange-traded funds.


The Directors and officers of any company are bound by fiduciary duties. These duties bound them to act in the best interest of the shareholders. However, when we consider shareholders, they are not bound to any such duties towards each other. More often people believe that owning 51% shares of company makes one its owner. But this statement is partially true since it does result in 51% ownership of the company, however, the shareholder does not get the right to use the companys building, materials or any other property for that matter. The reason behind such a thing is that the company is also considered as a legal person and thus it holds all its assets itself. This fact is important when we talk about areas such as insurance, which has to be in the name of the company and not in the name of the main shareholder.