Stocks

One of the most commonly used terms in the financial markets is stocks and shares, but what do the terms stocks and shares really mean? Of course if you are an experienced trader you will already have a clear understanding of this terminology so we apologise in advance for teaching you ‘to suck eggs’!

If you own shares in a company, you would be referred to as a shareholder, it means that you own a unit or units in a particular company. Owners would sell shares in their company as a way of generating capital or to reduce their ownership by having part ownership with other shareholders. Should a company be listed on the stock market the company is required to strive to maximise value to all the shareholders. In large companies there may be thousands of people that own shares and through the purchase of these shares in the company have the right to make decisions. This clearly would not be practical, so a Board of Directors is voted in by all the individuals that own shares to control the company on their behalf. Stocks in the United States are the same as shares are in the UK.

Stock can be either common stock which has the benefit of voting rights or preferred stock that does not give any rights on voting but does provide the right to dividend payments to be received in preference to other shareholders. Convertible preference shares allows for the option of conversion of preferred shares into a set number of common shares.

Stock can also be derivatives, which are financial instruments that have a value in the ‘underlying’ market of an asset; these might be loans, commodities, indices. Stock futures are contracts with a specific date of completion where the purchaser has an obligation to buy ‘long’ and the seller has an obligation to sell ‘short’. Stock options are usually transferable options to purchase (call option) or sell (put option) at a fixed price but are not obligations by either the seller or the purchaser.