Share this Page URL

Lesson 4. What Is a Stock? - Pg. 18

18 Chapter 4. What Is a Stock? In this lesson you will learn what defines a stock, how stocks operate, and how to differentiate among the various types of stock. Stock Talk A stock is a proportional ownership interest in a company. Or, in simplest terms, a stock is a portion of the value of a company. When you buy stock in a company, you are actually purchasing a piece of that company. For example, let's say that we added up all of Widget Inc.'s assets, or the things that Widget Inc. owns--computers, office buildings, etc.--and the value of everything came to $1,000.00. Then let's say for argument's sake that Widget Inc. issues 1,000 shares of stock for people to buy. If you buy one share of Widget Inc., you own 1/1,000 of everything that Widget Inc. owns. A stock is a means by which the average person can purchase a company by dividing its purchase price into shares small enough to be accessibly priced for everyone. You are actually an owner of the world-famous Widget Inc. company, and, as such, you get all the rights and responsibilities that go along with being an owner. When the management of Widget Inc. makes decisions regarding the company, like buying a new building, they need to get your approval --yours and the other 999 people's, assuming each bought one share like you. If you buy two shares you own twice as much of the company and have twice as many votes in decisions on how it will be run. While the company's board of directors will deal with most day-to-day issues, it is your vote which places them or removes them from the board, thereby making you the ultimate authority. You can go to the company's annual meeting and cast your vote, or you can vote by absentee ballot. The absentee ballot is called a proxy; it is a legal form by which an investor votes in absentia, transferring his or her voting authority to another party. A proxy is the ballot form that is sent to shareholders for their votes. Since few people actually attend annual meetings, the word "proxy" has become synonymous with the vote itself. Most people refer to "voting their proxy." The rights and responsibilities of owning stock, as discussed earlier, both apply to a proxy in that voting on how the company operates is a right reserved exclusively for stockholders. It is also your responsibility, however, in that by not voting, you are leaving the management of "your" company in the hands of others. Plain English Plain English