What is a stock?

What is a stock?

A stock represents ownership of a corporation. If you own all the stock (also called shares), you own all the assets of the corporation. If you own 40% of the stock, you own 40% of the assets and have a 40% vote at the shareholders' meeting. Big corporations have millions of shares outstanding and are owned by millions of shareholders.
Stocks are traded in the market at prices determined by supply and demand. Corporations go in and out of favor; prices rise and fall. Benjamin Graham, an eminent analyst, said that, "In the short run, the market is aа voting machine; in the long run, it is a weighing machine." In the long run, stocks trade at reasonable prices. If a company prospers, so will its shareholders.
When you buy shares, you are buying a piece of a corporation. It may be located on the other side of the world; you may not be able to put your piece of it on a shelf; but it is nonetheless real. You should ask the same questions that you ask before buying anything. Is it what you need? Is it a good value? Can you afford it?
The value of a stock changes continuously. Like money, it is worth what someone will give you for it. How do you know whether a particular stock is cheap or expensive?
If corporation Q has a million shares outstanding and the share price is $10, the market is saying that Q is worth ten million dollars. This amount (the number of shares times the share price) is known as the "market capitalization" ofа a corporation. It is a good starting place for evaluating the share price.
If corporation B has a share price of $50 and has 200,000 shares outstanding, its market "cap" is also ten million dollars, the same as that of Q even though their share prices are very different. You must know how many shares have been issued in order to know what the market thinks a corporation is worth.
Why do corporations have different numbers of shares? For one thing, they can begin with different numbers; it doesn't matter however many were originally issued, they represented 100% of the corporation's assets. Over time, corporations can issue more stock in order to raise money or to reward employees who have been given stock options. If share prices rise greatly, corporations often "split" their stock, halving the share price and doubling the number issued at the same time. There is no change in the market cap, but investors prefer trading lower priced shares. A growing corporation may split its shares over and over again.