What are Stocks - Essay Example

What are Stocks The Webster's New World Dictionary defines Stocks as The capital invested in a company or corporation through the buying of shares each of which entitles the buyer to a share in the ownership and voting rights etc. Stocks are a kind of "Security" which will be representative of the equitable share of ownership of a corporation or a business concern. The owners of the stock in a business thus are the equitable owners of the business to the extent of the percentage that they have contributed(Maunder 3rd Ed).This ownership yields them the power or mandate to control the voting rights and have a share in the company's profits which accumulate through dividends /capital appreciation. (Maunder 3rd Ed)Also in the event of liquidation/insolvency the stockholders will be the last ones to have their claim to the capital satisfied (After the bondholders, Creditors, and preferred stockholders).(Maunder 3rd Ed) Generally the common stockholders will only be entitled to one vote per share to be able to nominate directors on the board of directors but this may not always be the case as sometimes the number of votes each director is entitled to may be proportional to the Common shareholders also receive voting rights regarding other company matters such as stock splits and company objectives. (Maunder 3rd Ed).However Common Shareholders are entitled to rights of pre-emption in the event of the company decision of offering more stock. Stocks can take many types and can be mainly classified as common stock and preferred stock in terms of the rights they confer upon their owners. Common Stock entitles its shareholders to voting rights as a partial owner of the company (in matters like stock splits etc). Preferred Stock:Preferred Stock pertains to the philosophy of "hybrid security", that is where there is a payment of a fixed dividend to its owners and this dividend does not fluctuate(it does not have to be paid this dividend if. Preferred stock can be either Cumulative( that is giving its owners the right to accumulate dividend payments missed before),Non-Cumulative (where no payment is made available for skipped dividends),Participating(stock with a higher rate of dividend) and Convertible(to shares). Trading in stocks is carried out at the stock exchange, by individual investors and hedge fund traders. However trading in stocks is no longer limited to the interaction at the Stock Exchange and stocks are also auctioned at the open stock exchange through "Open Outcry" and share purchases can also be made online.An example of the physical/conventional stock exchange model is New York Stock Exchange which is a listed exchange. How are stocks traded on a listed exchange Orders for the purchase of stock are entered through the exchange members and go on to the specialists Once a purchase has been made the specialist will close the difference taking into amount the time considerations. The details of the trade are recorded and sent back to the relevant brokerage firm.The modern day physical stock exchange is also highly computerised. An example of virtual listed exchange is NASDAQ which includes trading only over the computer and the traders will be matched through the computer system. Another example of an electronic stock exchange is the The Paris Bourse. Why are stocks and stock markets an integral part of the Economy Significant source of funding for large companies in a public way as stocks present a fairly liquid investment option unlike investment in property etc. Rising stock prices indicate a booming economy and good business investment. Stock prices are on the top agenda of financial regulators like the state/central bank as any unusual variation in these prices will adversely affect the health of the economy. Therefore the smooth exchange of stocks and shares facilitates entrepreneurial success and long term success in an economy. Currently there is an increased trend of investing in stocks rather than government based securities like bonds etc in the developed economic systems like European Union, the United States and Japan. The risks associated with having stock prices as a primary source in an economy are many as Stock Prices tend to fluctuate frequently and any major slump in stock prices can make or break many financial institutions and the investment of individual investors. The Stock Market Index will illustrate the movements of prices in a market or part of a market (for example the FTSE index). Indexes typically categorize companies by their market capitalization. Three major index families are Standard & Poor's, The Frank Russell Company, and Wilshire Associates. Recent Statistics show an increased worldwide investment.(See Diagram above from the Economist 2007) It is reported that there was a $505 billion worldwide investment in 2004 which showed a 29.8% increase over the $389 billion investment in stocks in 2003(World Federation of Exchanges: The Economist 2007).In Stark Contrast to 2003-4 global market capitalization has peaked recently in September 2007 to an all time high of $59.74 and this is a 31% increase compared to 2006. (World Federation of Exchanges: The Economist 2007) This is an indicator of an overall increase in global stockbased market wealth since the past five years have shown a creation of almost $40 of Wealth since the year 2002. (World Federation of Exchanges: The Economist 2007) . References The Economist Magazine (Sept 2007) Wikipedia.com Economics Explained 3rd Ed.: Books: Peter Maunder,Danny Myers,Nancy Wall by Peter Maunder,Danny Myers,Nancy Wall. Webster's New World Dictionary (3rd Edition) James P. O'Shaughnessy What Works on Wall Street, A Guide to the Best-Performing Investment Strategies of All Time, ,3rd Revised edition, McGraw-Hill Education Read More