Essentially, the stock of a business represents the original amount of money that went into founding it. Since a business’ stock can’t be withdrawn to the disadvantage of its creditors, it serves as a security to them. When a new business is being formed, the stock of this business is divided into shares, and every share will have a particular declared face value that depends on the total amount of capital that was invested in the businesses. Shares represent a portion of ownership in a company, and there may be different sorts of shares with different ownership rules, privileges or share values.
Usually stock will take the form of shares of common stock or preferred stock. Common stock is a unit of ownership and generally comes with voting rights that can be used when corporate decisions are being made. Preferred stock usually doesn’t come with voting rights but people who own preferred stocks are legally entitled to receive a certain level of dividend payments before any dividends can be issued to other shareholders.
The rules and perks of stocks varies however; some shares of common stocks can be issued without usual voting rights, or some shares may have special rights that are unique to them that are given only to specific parties. Preferred stock might have qualities of bonds blended in with common stock voting rights in addition to preference in the payment of dividends over common stock.
Any type of financial instrument whose value depends on the price of its underlying stock is called a stock derivative. The two main types of stock derivatives are futures and options. Stock futures are contracts where the buyer is long, or when they take on the obligation to buy the stock, and the seller is short, or when they take on the obligation to sell the stock. A stock option is the right to buy stock in the future at a fixed price (a call option) and the right to sell stock in the future at a fixed price (a put option). So, you can see that the value of a stock future and a stock option changes as the value of the stock it is derived from fluctuates. To Be Continued In Part Two
Mallory Megan works for Rapid Recovery Solution and writes articles on medical collection agencies. Free reprint avaialable from: Stock 101 Part One.
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