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Stock Classification

Stock is ownership in a company, with each share of stock representing a tiny piece of ownership. The more shares you own, the more of the company you own, and the more dividends you earn when the company makes a profit. In the financial world, ownership is called equity. Stocks are in two primary classes. The one you choose depends on what you want from a stock. Preferred stock typically pays regular dividends, and investors who want income foremost from their stocks favor it. Common stock represents ownership of a company and may offer more rights and privileges than preferred stock.

Issuing Stock

Businesses issue stock to raise money. They use this money to finance expansions, pay for equipment and fund projects, etc. Corporations issue stock when they may need additional capital to operate successfully. The fancy term for issuing stock to raise money is equity financing. The money received from investors who buy stocks is called equity capital. In the world of securities, the word “equity” usually refers to stocks. The other method of raising money is debt financing, which involves selling bonds. When companies make profits, they may reward their stockholders with pieces of their profits, known as dividends. Dividends are an incentive for investors to hold stocks. Now that you know the why of buying stocks, you will need to know the where.

The Stock Market and Stock Exchanges

Investors may purchase stock on the primary or secondary market. A company sells its stock to the public on the primary market through its initial public offering. The primary market is the market in which investors have the first opportunity to buy a newly issued security. Investors may sell their shares through brokers to other investors on the secondary market. The secondary market can be structured as an auction market, such as the New York StockExchange (NYSE), or a dealer market, such as the National Association of Securities Dealers Automatic Quotation System, called NASDAQ. Stock prices (quotes) can be found in newspapers, on television and the Internet. Stock exchanges are the physical locations where stocks are bought and sold. The over-the-counter (OTC) market refers to a market in which securities transactions are conducted through a telephone and computer network connecting dealers in stocks and bonds, rather than on the floor of an exchange. Together, these two markets (stock exchange and OTC) form the secondary market. The primary and secondary markets together make up the stock market. Exchanges are located all over the world, with the most famous one being the New York Stock Exchange. The NYSE annually trades almost $12 trillion dollars worth of capital. Thousands of stocks are listed on this exchange. When you buy a stock, you will need to learn which exchanges list it. Other than locating a quote in the newspaper, with online trading and the automation of order systems, customers have very little reason to determine where the stock trades from.