Definition of stock

In finance, a stock represents a share in the ownership of an incorporated company. In industrial societies wealth used in production is owned in the aggregate mostly by corporations rather than by individuals because of the huge investments required. This trend began in 17th-century England when merchants formed JOINT-STOCK COMPANIES, pooling capital to be used jointly in trading and manufacturing. Participants then received dividends, shares of the common PROFIT proportionate to their original investments.

The wealth of individuals includes claims against, or investments in, corporations. These are called securities, the two most common being bonds and stocks. Corporate bonds are evidences of corporate debt to the bondholder. Stocks are evidences of ownership, or equity. Investors buy stock in the hope that it will yield income from dividends and appreciate, or grow, in value.

Shares of widely held companies are traded on STOCK MARKETS. Stockholding is popular because it represents an ownership of capital that can be transferred easily by means of organized trading in the stock markets. There are two classes of stock: preferred and common.

Owners of preferred stock are entitled to a fixed or predetermined dividend before any common stock dividends can be paid. If profits are too low in any given period to cover all or part of a preferred dividend, the unpaid amount may be accumulated as a claim against future earnings. Preferred stock also has first claim if a company is liquidated and the proceeds divided among its shareholders.

Common stock carries with it all claims to a company's assets and earnings that have not been assigned to preferred stock or to corporate debt. Once preferred stock dividends have been met, any remaining profits are available for distribution to the common stock shareholders. Because there is no limit on the amount of dividends a common stock may receive, its market value tends to reflect assumptions made by investors as a group about the company's ability to increase earnings and thus pay higher dividends in the future. Although common stock offers less security of income and generally lower current yields, it is much more likely to increase in market value than preferred stock.

Each owner of a corporation's common (and sometimes its preferred) stock is entitled to vote, on the basis of one vote per share held, for the company's directors, who in turn appoint its day-to-day management. If enough stockholders are dissatisfied with a company's performance, they can vote in a new management.

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