A stock, also known as a share, is the most common form of equity instrument. When a company seeks to raise funds from the public, one of the ways to do this is issuing stocks. However, before a company can offer its stocks to the public, it must first be listed on a stock exchange. This initial offering of stocks to the public is called an initial public offering (IPO). The stock market plays a crucial role in capital markets by enabling companies to raise equity capital from investors through listing on the exchange. Furthermore, it allows investors to sell their stocks, increasing their transferability and liquidity, thus making it easier to convert stocks into cash.
Stock ownership. Stock ownership represents partial ownership of the company that issued the shares. Although a share or stock represents a “claim” of the stockholder to the company, the company is a separate legal entity. A share is a stake in a company's capital, granting the right to control that capital, meaning participation in the management of the company, and the right to profit, meaning participation in the company's earnings. Unlike a sole proprietorship or a private partnership in which the shareholder or owner can exert direct control, a stockholder of a publicly listed company can only exercise influence indirectly, through the voting rights provided by their stock ownership. The condition of control is determined by the principle: 1 share equals 1 vote. The lack of direct control is the flip side of the limited-liability feature of all listed companies. This feature ensures that the maximum loss for a shareholder is limited to their stock investment. In this regard, a shareholder is not obligated to answer for the company's debts, even if it incurs losses. The maximum a shareholder can lose is the amount they invested in the shares.
Majority and minority shareholders. A shareholder who purchases more than 50% of the shares becomes a majority shareholder. This grants them significant influence over decisions that require a simple majority vote. However, they cannot act to the detriment of other shareholders. Normally, the law in many countries protects "small" or minority shareholders. Additionally, qualified majority (usually 2/3 or 3/4 of all votes) is required for the most important decisions, which cannot be achieved without the votes of minorities. This ensures that even a majority shareholder cannot make unilateral decisions on critical matters.
Board of directors and managers. Controlling the activities of a joint-stock company (JSC) does not mean going there every day as if going to work. For this purpose, managers are hired to manage the company operationally. Managers report annually to the board of directors, which is elected at the general meeting of shareholders. All this is not bureaucratic formality. The board of directors is responsible for the company's strategy, which managers are responsible for implementing. With good results, managers can receive bonuses (which can be significant), and with poor results, they can be simply dismissed.
Shareholder rights. In addition to attending and participating in the company's annual general meeting, stockholders are entitled to certain rights, including stock bonuses when declared, and to receive the company's audited financial statements. The voting right allows shareholders to elect board members and vote on major issues related to the company's operations and future performance. Important strategic issues, such as mergers and acquisitions and large investments, require shareholder approval. Shareholders can either vote directly on these issues or appoint a proxy to vote on their behalf.
Dividends. While shareholders have a say in company control through voting, dividends represent a portion of the company's profits that are distributed to shareholders. Dividends are paid out from a portion of the company's profits remaining after necessary expenses like salaries, taxes, and debts are covered. Shareholders can choose to receive these dividends as income or allow the company to retain them for reinvestment in new projects and further growth (known as retained earnings). Dividends, typically paid 1-2 times a year, can help maintain shareholders' current income. However, the size of future dividends is uncertain as company profits can be difficult to predict even for the coming year, let alone the more distant future.
Capital gain. The second source of shareholder income, which helps increase their investment capital, is the growth in the share price.Here shareholders face a well-known dilemma: a guaranteed dividend (a bird in the hand) today or the potential for greater future returns through share price appreciation (two birds in the bush). Shareholders may benefit from temporarily foregoing dividends so that the company can invest these funds in new profitable projects. Then, the increase in the share price will more than compensate for the dividends not received. But there is always a risk that the expected growth may not materialize.
Stock yield. Dividends and share price growth provide the yield of the stock. It is calculated as the shareholder's income (including dividends and price growth) as a percentage of the invested amount.
For example, you bought 10 shares at a price of 100 dollars each. After a year, you found out that each share brought you dividends of 5 dollars and increased in price by 10 dollars. As a result, your income for the year amounted to 10 x (5 + 10) = 150 dollars, and the yield is (5 + 10) : 100 = 15%.
The choice of a stock depends on many factors. One of them is the size of the company. Stocks can be categorized by company size: large, medium, and small. Shares of large companies are more reliable because they have a greater margin of safety during crises.
Exchange and Broker. The exchange is a central marketplace where securities are traded according to established rules. It facilitates the execution and settlement of transactions, creating a complete trading infrastructure. Prices of securities on the exchange are called quotations.
You can build your investment portfolio and engage in trading either independently or through a professional manager. For independent investing, you'll need a broker to act as an intermediary. Brokers are the only ones granted direct access to the exchange, the central marketplace for securities trading.
A broker provides access to trading on the stock market and works for a commission, usually a percentage of the total transaction value. The higher the trading volume, the lower the commission rate might be. Brokers act as facilitators whose primary role is to execute trades. Their compensation typically comes from commissions, regardless of your investment outcome. You can communicate with your broker by phone, online, or use their software to place buy and sell orders yourself.
