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What Truly Is A Stock?

Aug 17, 2007
A stock is a unit or say a small piece of a company that can be bought and sold on the market.

It is a certificate that shows that you own a small fraction of a corporation. When you buy a stock, and it is most important to understand if you are paying for a small percentage of everything that the company owns, say the buildings, the chairs, the computers, and so on.

When you own a stock , it is then most important to understand that you are referred to as a shareholder or a stockholder. In real meaning, it is a representation of the amount of a company that you own.

The benefit of owning a stock in a corporation is that whenever the corporation profits, you profit as well. It also gives you the right to make decisions that can influence the company. Each one you own has a little bit of voting power, so the more stock you own, the more decision making power you have.

There are basically two types of stock. They are the common stock and the preferred stock. Both types of stock have their pros and cons, so before buying a corporations stock, you must decide which one pleases you the most.

A common stock is the basic a corporation generally issues. It just shows that you own a fraction of the company. The common ones are directly influenced by failures and successes of the company. Common stock is more of a gamble. Since there is a higher chance of making profit, common stock owners are issued their dividends or profits after the preferred stock.

After all the common stock has been issued, companies begin to distribute the preferred ones. The preferred owners are given their dividends before the common owners are. Also, if the company goes out of business, and liquidates, then the preferred owners are paid back the money they invested before the common stockholders are reimbursed.

Here the main drawback of preferred stock is that they cannot benefit as much from company profits because they are only paid a fixed dividend payment.

How Are The Prices Of Stocks Determined?

Their prices are determined by two methods, the Itayose and Zaraba methods. The Itayose method is mainly used to decide opening and closing prices, and the Zaraba method is used during continuous auction trading for the rest of the trading session.

The Itayose Method Is Used To Verify Price Traits Within The Following Situations:

1. The opening and closing prices for the morning and afternoon sessions.
2. The initial price after resumption after a trading halt.
3. The price when a special quote is indicated.

In dealing with stock, the Zaraba method is used in a continual process to match orders during the rest of the trading session when the order book is not locked or is crossed with orders like in the example above. New orders are matched with those already on the order book.

When no one is buying because of a high price, companies will often issue a split. When they issue such a split, a company gives you more stock for your money. They then simply distribute and decrease the price. This just allows someone who doesn't have as much money to invest in a company.

If you or someone you know own one in a company that splits two for one, the you can obtain twice the amount of shares that you had before, but each will have a decreased in value by fifty percent.

It can also be split into any number, but they can also reverse split which means that they double in value, but you only obtain to keep half of what you had before. In an either split, you do not lose any money. It is just like trading in two five dollar bills for one ten dollar bill, or vice versa.

Shares have always been traditionally represented by a piece of paper - a certificate. Increasingly, though, shares trade hands electronically, so in general speaking, if you or someone that understands and has the expert knowledge invest with a brokerage firm like ShareBuilder you can never actually see a physical certificate for the shares that you own.

The brokerage holds the shares on your behalf in what is known as in street name, which is nothing more than a method of bookkeeping and lacks affect whatsoever on your ownership of the stock.

It does take away the pleasure of holding onto a beautifully engraved piece of paper that represents your ownership in a company, but owning shares in street name is much more efficient and simple, especially when it comes time to sell.
About the Author
William Smith the author provides much more financial information on many subjects as well as the secret to his success in the market along with 5 Free power stock picks emailed daily so grab your Free subscription on his website at Stock Picks (All is Free)
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