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Stocks - Basic information

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Stocks are exchange-traded securities that give rights of ownership to their holder. Normally, they are bought and sold publicly on the stock market exchange; nevertheless, private transactions of stocks are also possible. Commonly, the purpose of issuing stock by a company is to raise the capital needed for its operations. This process allows for the fast expansion of a company's capital and businesses.

 

Key takeaways: 

  • Stocks are publicly traded companies.
  • Stocks are also called equities.
  • Global Industry Classification Standard (GICS) divides stock market sectors into eleven categories.
  • The investable universe of publicly traded companies includes more than 50,000 businesses worldwide.[1]
  • Stocks tend to be more volatile than indices. 
  • Some stocks can generate passive returns in the form of dividend payments. 

 

Shareholders and issuers

The stock owner is called the shareholder, and the eminent of the stock is called the issuer. Shares entitle a shareholder to the corresponding ownership of the company's assets and profit. However, a shareholder does not own the company itself. In addition to that, a shareholder does not carry any legal liability for a company's actions. That is because a company is viewed as its own legal entity. Shareholders can be either major or minor. Major shareholders hold over 50% of outstanding shares in a company, while minor shareholders hold less than 50% of outstanding shares.

 

Stocks and shares

There is only a slight difference between the terms “stocks" and “shares.” The term “stocks” is more general and can refer to a single company or a broad group of companies, while the term “shares" usually refers to one particular company. Nowadays, these two terms are used interchangeably. 

 

Separation of ownership and control

Separation of ownership and control is associated with publicly traded companies. It refers to claims on management's decision-making and claims on a corporation's assets and profit. In publicly traded companies, shareholders have limited rights to control the company and possess only legal claims to its profit and assets. 

 

Stock market sectors categorization according to the Global Industry Classification Standard (GICS)

  • Energy
  • Materials
  • Industrials
  • Consumer discretionary
  • Consumer staples
  • Healthcare
  • Financials
  • Information technology
  • Communication services
  • Utilities
  • Real estate

 

Voting rights

Voting rights represent a shareholder's ability to vote on policy matters within a company. These may include issuing new shares, appointing members to the board of directors, approving acquisitions and mergers, and other matters.

 

Common stock and preferred stock

There are two categories of stocks: common stocks and preferred stocks. Common stocks entitle a shareholder to vote at shareholders' meetings and receive dividends. Furthermore, they usually have a better yield over the long-term, but at the cost of higher risk in case of a company's liquidation. Preferred stocks differ from common stocks in that they usually come with limited or no voting rights. In addition to that, preferred stocks have higher claims on dividends and distribution of assets by a company, meaning that in case of a company's bankruptcy, preferred shareholders have priority over common shareholders.

 

The image displays the daily chart of Berkshire Hathaway stock class A (BRK.A), which is priced in hundreds of thousands of U.S. dollars.

Source: https://www.tradingview.com/x/lOE6hCqc/ 

 

The picture above shows the daily graph of the Berkshire Hathaway stock class B (BRK.B).

Source: https://www.tradingview.com/x/rI7GzJJF/ 

 

Dividends

A dividend represents the distribution of corporate profits to eligible shareholders. Many stock titles tend to pay dividends to their investors on a regular basis, which can be monthly, quarterly, semi-annual, or annual. Dividends can be either in the form of cash or stock. Typically, common shareholders are eligible for dividend payments when they hold a stock before the ex-dividend date. 

 

Ex-dividend date

Entitlement to dividend payments is determined by the ex-dividend date. If an investor buys an asset prior to the ex-dividend date, then he or she will be entitled to the upcoming dividend payment. The right to dividend payment does not cease to exist even if an asset is sold prior to the actual payment by a company.

 

Split and reverse split

The split refers to the corporate action in which the number of outstanding shares changes, but their value stays the same. For example, if a company decides to split its shares in a ratio of three to one at the price of $300 per share, then an investor will receive three shares valued at $100 for each share held before the split. The reverse split also exists.

 

Stocks categorization

  • Defensive stocks - Defensive stocks tend to provide consistent returns without regard for the economic conditions. They often belong to the sector of utilities, healthcare, or consumer staples. 
  • Growth stocks - Growth stocks have higher earnings and grow faster than the market average. They are usually bought with the purpose of capital appreciation. Growth stocks rarely pay dividends. 
  • Income stocks - Income stocks generate consistent income by paying dividends
  • Value stocks - Value stocks have a low price-to-earnings ratio. 
  • Blue-chip stocks - Blue-chip stocks are well-known companies with a stable history of growth. 
  • Penny stocks - These stocks are small public companies whose shares typically trade below the price of $1 per share. 
  • ESG stocks - ESG companies implement the environmental, social, and corporate governance agenda into their functioning. 

 

Correlation

Some stocks tend to show a correlation with other assets. Such correlation can be positive or negative. A positive correlation means that two assets behave similarly. For example, when oil rises, oil companies also tend to increase. Contrary to that, a negative correlation describes such behavior in which assets move in opposite directions. 

 

The daily graph presents the First Majestic Silver (FMV) stock, a mining company in the precious metals sector. The orange line represents a silver (XAGUSD). A strong positive correlation can be observed between these two different asset classes.

Source: https://www.tradingview.com/x/HIxr8xi2/ 

 

Seasonality

Some stocks are prone to seasonal cycles, meaning they tend to show the same or similar behavior based on a particular calendar season. This concept also applies to commercial and industrial trends. For example, the oil boom during the 20th century resulted in growing prices for oil and oil stocks. Similarly, the technological progress of computer technology in the 21st century allowed for the creation of several dominant tech companies like Alphabet, Apple, Amazon, Microsoft, and Meta Platforms.

 

Examples of stock market exchanges

  • New York Stock Exchange
  • Nasdaq 
  • Toronto Stock Exchange 
  • Deutsche Börse AG
  • London Stock Exchange
  • Shanghai Stock Exchange
  • Hong Kong Stock Exchange

  1. World Federation of Exchanges
    https://www.world-exchanges.org/ 
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