MBF3C1-02-2013-2014

Whether you say shares, equity, or stock, it all means the same thing.

The management of the company is supposed to increase the value of the firm for shareholders.

he importance of being a shareholder is that you are entitled to a portion of the company's profits and have a claim on assets.

Profits are sometimes paid out in the form of dividends.

In case of liquidation, you'll receive what's left after all the creditors have been paid.

Another extremely important feature of stock is its limited liability, which means that, as an owner of a stock, you are not personally liable if the company is not able to pay its debts.

The reason is that at some point every company needs to raise money.

A company can borrow by taking a loan from a bank or by issuing bonds. Both methods fit under the umbrella of debt financing.

Issuing stock is advantageous for the company because it does not require the company to pay back the money or make interest payments along the way.

The first sale of a stock, which is issued by the private company itself, is called the initial public offering (IPO).

It must be emphasized that there are no guarantees when it comes to individual stocks.

Over the long term, an investment in stocks has historically had an average return of around 10-12%.

Taking on greater risk demands a greater return on your investment.

Without dividends, an investor can make money on a stock only through its appreciation in the open market.

stock is a share in the ownership of a company

As an owner, you are entitled to your share of the company's earnings as well as any voting rights attached to the stock.

A stock is represented by a stock certificate.

This is a fancy piece of paper that is proof of your ownership.

Being a shareholder of a public company does not mean you have a say in the day-to-day running of the business.

Instead, one vote per share to elect the board of directors at annual meetings is the extent to which you have a say in the company.

Your claim on assets is only relevant if a company goes bankrupt

the importance of stock ownership is your claim on assets and earnings. Without this, the stock wouldn't be worth the paper it's printed on.

Owning stock means that, no matter what, the maximum value you can lose is the value of your investment.

ompanies can either borrow it from somebody or raise it by selling part of the company, which is known as issuing stock.

On the other hand, issuing stock is called equity financing.

When you buy a debt investment such as a bond, you are guaranteed the return of your money (the principal) along with promised interest payments. This isn't the case with an equity investment.

By becoming an owner, you assume the risk of the company not being successful - just as a small business owner isn't guaranteed a return, neither is a shareholder.

This means that if a company goes bankrupt and liquidates, you, as a shareholder, don't get any money until the banks and bondholders have been paid out; we call this absolute priority.

Shareholders earn a lot if a company is successful, but they also stand to lose their entire investment if the company isn't successful.

And there is no obligation to pay out dividends even for those firms that have traditionally given them

This is the reason why stocks have historically outperformed other investments such as bonds or savings accounts

Investors get one vote per share to elect the board members,

Preferred stock represents some degree of ownership in a company but usually doesn't come with the same voting rights.

investors are usually guaranteed a fixed dividend forever.

Another advantage is that in the event of liquidation, preferred shareholders are paid off before the common shareholder (but still after debt holders)

The purpose of a stock market is to facilitate the exchange of securities between buyers and sellers, reducing the risks of investing.

is nothing more than a super-sophisticated farmers' market linking buyers and sellers.

The primary market is where securities are created (by means of an IPO) while, in the secondary market, investors trade previously-issued securities without the involvement of the issuing-companies.

The most prestigious exchange in the world is the New York Stock Exchange (NYSE).

The NYSE is the first type of exchange (as we referred to above), where much of the trading is done face-to-face on a trading floor. This is also referred to as a listed exchange. Orders come in through brokerage firms that are members of the exchange and flow down to floor brokers who go to a specific spot on the floor where the stock trades.

The second type of exchange is the virtual sort called an over-the-counter (OTC) market, of which the Nasdaq is the most popular

Public companies are required to report their earnings four times a year (once each quarter).

If a company's results surprise (are better than expected), the price jumps up. If a company's results disappoint (are worse than expected), then the price will fall.

Of course, it's not just earnings that can change the sentiment towards a stock (which, in turn, changes its price).

1. At the most fundamental level, supply and demand in the market determines stock price. 2. Price times the number of shares outstanding (market capitalization) is the value of a company. Comparing just the share price of two companies is meaningless. 3. Theoretically, earnings are what affect investors' valuation of a company, but there are other indicators that investors use to predict stock price. Remember, it is investors' sentiments, attitudes and expectations that ultimately affect stock prices. 4. There are many theories that try to explain the way stock prices move the way they do. Unfortunately, there is no one theory that can explain everything.