Stocks are ownership shares of a company. Companies issue stock to raise capital for their business. There are two types of stock: common stock and preferred stock. Holders of common stock, called shareholders, have an ownership stake in the company based on the number of shares they purchase. Because of the voting rights of common stock, shareholders control the business. Preferred stock is another form of equity ownership in a corporation.
Shares of common stock are issued in the primary market through an initial public offering (IPO) and then trade in the secondary market, typically on a stock exchange, through an intermediary known as a brokerage firm. Companies issue a finite amount of shares through an IPO but may issue more shares to raise additional capital. The market value of a company is found by multiplying the shares outstanding by the stock price. Investors purchase shares of a stock when they believe the company’s value will increase in the future, and prices fluctuate as investors continually re-evaluate the company’s prospects.
The Stocks Handbook discusses why companies issue stock and how investors can buy and sell stock in an open marketplace.