What is a Stock or Equity or Share of a Company?
The stock (or equity or share) of a Company is fractional ownership of a company in proportion to the total number of stock / equity / shares of the company. Thus, if you own 1 share of a company with 10 shares, then you own 1/10th or 10% (1 share / 10 shares = 0.10) of the company.
Thus, it also means that if the company was sold or liquidated, after paying of all expenses and debts, the remaining or residual capital (money or assets) would be distributed to the stockholders in proportion to their share in the company.
Stock, equity, and share are used interchangeably in that you own stock in the company, or own equity of the company, or own a share of the company.
Stock Exchanges
When a company offers shares to the public, i.e. for ordinary folks like you and I to purchase, the company has to list the stock on what are called Stock Exchanges. Stock Exchanges are like a market where buyers and sellers of stock come together to buy and sell stocks they want or have, respectively. The Stock Exchanges provide a marketplace to trade in stocks. The dealers and intermediaries that help buy and sell stock on these Stock Exchanges are called market makers in that they facilitate the buying and selling of stock between entities, which could be companies and / or individuals.
Stock Trading Accounts
You open a stock trading account in which you make available money to buy stocks you want or in which the money is received as proceeds from your sale of stocks. The stock trading account is linked to your bank account so that you can transfer money to the stock trading account when you want to buy stock or transfer money back to your bank account if you have sold stock and don’t need the money in the stock trading account for buying further stock. Dividends declared by a company are also deposited into your bank account that is linked to your stock trading account.
Dividends
As the company, of which you own stock, makes profits, the management may decide to provide return to the shareholders in the form of dividends. Dividends are payments declared by the company in the form of a fixed amount per share, and are generally declared annually (European and Indian companies) or quarterly (Canadian and US companies) after or along with the declaration of annual or quarterly results of the company.
Capital Gains
When you sell the stock that you hold, you will either make a profit or loss on your sale. Profit is called Capital Gains, and loss on the sale is called Capital Loss. If you held the stock for less than a year, then the Capital Gain or Loss is called Short Term Capital Gain / Loss (STCG/L), and if held it for more that a year before selling, then its call Long Term Capital Gain / Loss (LTCG/L).
In future posts, we’ll discuss buying and selling of stock in more detail.
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