What is a Stock?

Stock allows you to own part of a business without ever having to show up for work. Dating back to the Dutch mutual stock corporations of the 16th century, the modern stock market exists as a way for entrepreneurs to finance businesses using money collected from investors. In return for financing the company, the investor becomes a part owner of the company. That ownership is represented by stock—specialized financial "securities," or financial instruments—that are "secured" by a claim on the assets and profits of a company.

Types of Stock

Common Stock
Common stock is an ideal investment vehicle for individuals because anyone can own it; there are absolutely no restrictions on who can purchase it. Common stock is more than just a piece of paper; it represents a proportional share of ownership in a company -- a stake in a real, living, breathing business. By owning stock, you are a part owner of a business. Shareholders "own" a part of the assets of the company and part of the stream of cash those assets generate. As the company acquires more assets and the stream of cash it generates gets larger, the value of the business increases. This increase in the value of the business is what drives up the value of the stock in that business.

Because they own a part of the business, shareholders get one vote per share of stock to elect the board of directors. The board is a group of individuals who oversee major decisions made by the company. The board wields a lot of power in corporate America. Boards decide how the money the company makes is spent. Decisions on whether a company will invest in itself, buy other companies, pay a dividend, or repurchase stock are all the purview of the board of directors.

As with most things in life, the potential reward from owning stock in a growing business has some possible pitfalls. Shareholders also get a full share of the risk inherent in operating the business. If things go bad, their shares of stock may decrease in value—or even end up being worthless if the company goes bankrupt.

Different Classes of Stock

Occasionally, companies find it necessary for various reasons to concentrate the voting power of a company into a specific class of stock where the majority is owned by a certain set of people. For instance, if a family business needs to raise money by selling equity, sometimes they will create a second class of stock that they control that has 10 votes per share of stock and sell a class of stock that only has one vote per share to others.

Securities and Insurance products offered through LPL Financial and its affiliates. Member FINRA/SIPC

Mutual Funds, annuities and other investments through LPL Financial are NOT deposits, are NOT insured by the FDIC, NCUSIF or any other regulatory agency, are not obligations of or guaranteed by LBS Financial Credit Union, or any other affiliated entity, are subject to investment risk including loss of principal and are subject to fluctuating rates of return. LPL Financial is not affiliated with LBS Financial Credit Union. Tom Corrado is registered to discuss and transact securities business to residents of the state of CA.


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