What Are Stocks And Shares?
Hello, traders. And welcome to the stock trading course and the first module, “Introduction to Stocks”. We are going to start from the beginning and in this lesson, I am going to go through what stocks and shares are and their definition. So, stocks or shares are the unit of investment in companies. One share is a unit of ownership in a company. So, when you buy one stock or one share of the company, it means that you are a partial owner of the company. You are a shareholder. Now, this doesn’t mean that you have a say in the day-to-day operations of this company, but it does mean that you are going participate in profit, if the value of the company grows. And you are going to have losses, if the value of the company decreases. This is why we trade shares.
A stock is represented by a stock certificate, which is a physical proof of your ownership. Nowadays, the certificates and records are kept electronically, by your broker. This makes trading shares on a daily basis easier, which keeps the liquidity of the markets high. Now, I am going to show you what a stock certificate for Google looks like. This is a Class A stock certificate for Google and you have all the information, of course all the information in this certificate has been blacked out. But you can see that you have the president’s signature, the seal of the company, etc.
Now, can you imagine how difficult would it be if for day traders to day trade stocks just to get a profit from a two or three dollar move in the stock price? If we would have to deal with these stock certificates and sign them over every time you traded? So, this is done by your broker, electronically, every time you buy a stock. Now, another important question before we move forward, is “What does being a shareholder mean?” First of all, being a shareholder means that you own a percentage of the company you have a stake in. All shareholders get one vote per share to elect the board of directors at an annual meeting.
The management of the company has a fiduciary responsibility for shareholders. This means that they have to work to increase the value of company for them. If this is not the case, shareholders can vote to have the current management team removed and replaced, in theory. And I say “in theory”, because to be able to do that you have a big stake in the company. What’s important for shareholders, actually, is that they are entitled to a portion of the company’s profit. This profit or the portion of profits you are entitled to, is correlated to the amount of shares that you own. This means that the more shares you own of a company, the higher the portion of the profit that you are entitled to is going to be. These profits are paid in the form of dividends.
Now, being a shareholder doesn’t just mean that you are going to profit from an increase in the stock price or an increase in the company value. But it also means that you are going to get a portion of the company’s profit, in the form of dividends.