Investing Advice

About Stock Market Basics

Companies are started by individuals or maybe a small circle of people. They pool their money or obtain loans, raising funds to launch the business. A choice is made to organize the business as a sole proprietorship where one person or a married couple owns everything, or as a partnership. Later they may choose to "incorporate". As a corporation, the owners are not personally responsible or liable for any debts of the company if the company doesn't succeed.

Corporations issue official-looking sheets of paper that represent ownership of the company. These are called stock certificates, and each certificate represents a set number of shares. The total number of shares will vary from one company to another, as each makes its own choice about how many pieces of ownership to divide the corporation into. One corporation may have only 2,500 shares, while another may issue over a billion shares such as IBM and Ford Motor Company.

Companies sell stock (pieces of ownership) to raise money and provide funding for the expansion and growth of the business. The business founders give up part of their ownership in exchange for this needed cash. The expectation is that even though the owners have surrendered a portion of the company to the public, their remaining share of stock will become increasingly valuable as the business grows.

Corporations are not allowed to sell shares of stock on the open market without the approval of the Securities and Exchange Commission (SEC).

The Golden Piggy Bank Page 36 This transition from a privately held corporation to a publicly traded one is called going public, and this first sale of stock to the public is called an initial public offering, or IPO. Usually an IPO is sponsored by an investment bank (the underwriter) such as Merrill Lynch, Salomon-Smith Barney, or Goldman Sachs.
 

Companies can choose to incorporate, by filling the appropriate papers and paying a fee, in any state that they choose. This becomes their charter state where they must maintain an office address.

Officers are chosen - president, vice-president, and secretary-treasurer, and a board of directors may be established. It is the board of directors' duty to represent the shareholders, who of course at the early stages of a company's life, are going to be the company founders.

Most corporations stay privately owned although they may elect to sell stock to qualified investors.

You can tell if a company is a corporation by seeing the "Inc." after its name, or other letters such as LTD or AG if the company is based in a foreign country.


According the U.S. Census Bureau, of the 5,579,177 registered businesses in the United States, 5,562,799 have less than 500 employees. Of the 16,378 big companies with over 500 workers, about half are privately owned.

 

Common Stock - standard shares issued by a corporation. Most stocks traded are common stock.

Preferred Stock - special class of stock that is issued without voting rights, but promises a fixed dividend. If a company is forced to liquidate and close its doors, preferred shareholders stand in line in front of common stock holders, for any proceeds available after secured creditors are paid. Most preferred stock trades on the NYSE at about $25.00 per share. More on page 38


Other Stock Market Basics Topics:

  1. Stock Market Basics
  2. Why invest in the stock market?
  3. Why Sell Stock?
  4. How are shares bought and sold on the NASDAQ?
  5. How stocks are traded on the New York Stock Exchange
  6. What are ECNs?
  7. Supply and Demand
  8. American Stock Exchanges
  9. International Stock Exchange
  10. What fuels demand for a stock?
  11. More to Know About Stock Trading
  12. Limit Orders
  13. Market Capitalization
  14. Preferred Stock
  15. How to Buy Stock?
  16. How much money do you need to open a brokerage account?
  17. Money Market Funds
  18. Margin Loans and Investment
  19. Corporation Executive Pay
  20. How much money do you need to open a brokerage account?

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