General Definition of a Stock:
A stock represents a share in the ownership of a company. It is an amount of the company’s assets and earnings. Stocks are also known as "shares" or "equity." When you own a stock, you are a part-owner of the company, and your ownership percentage is proportional to the number of shares you own relative to the company’s total number of shares.
Why Corporations Issue Stocks:
Corporations issue stocks normally to raise capital. This money is used to expand their operations, fund new projects, pay off debt, or buy other companies. By issuing stocks, companies can obtain funds without having to repay a loan or incur debt obligations. This method of raising capital allows companies to access large amounts of money that they can use to grow their business.
What a Shareholder is:
A shareholder, is an individual or institution that owns one or more shares of a company’s stock. Shareholders are owners of fractions of the company and have certain rights. These rights can include voting on important company matters, receiving dividends (if distributed), and claiming a portion of the company's assets in case of liquidation. The extent of these rights and privileges often depends on the type of shares owned.
Difference Between a Stock and a Bond:
Stock:
Ownership: Represents ownership in a company.
Returns: Potential for dividends and appreciation in share price. Dividends are not guaranteed and depend on the company’s decision to distribute profits.
Risk: Higher risk due to market volatility and the potential for losing the invested capital if the company performs poorly.
Voting Rights: Majority shareholders typically have voting rights on corporate matters, such as electing the board of directors.
Duration: No fixed maturity date; stocks can be held indefinitely.
Bond:
Ownership: Represents a loan made by an investor to a corporation or government.
Returns: Fixed interest payments (coupon payments) and return of the principal amount at maturity.
Risk: Generally lower risk compared to stocks, but still subject to interest rate risk, credit risk, and inflation risk.
Voting Rights: Bondholders do not have voting rights in the company.
Duration: Bonds have a fixed maturity date, ranging from a few months to several decades, at which point the principal amount is repaid.
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