Stock is the share in the ownership of the company. Stock represents the claim on the company’s assets and earnings. In other words, it means, the more the stock, the ownership stake in the company becomes greater. The stock is represented by a stock certificate which is a document that proves the ownership in the company. Few years ago when the person wanted to buy or sell shares, he/she physically took the certificates to the brokerage firm. But now information technology has increased, because of which this stock document is stored electronically. Now trading with a click of mouse or a phone call has made transacting easier. The stock certificate is considered worthless if there is no claim on the ownership of the company’s assets and earnings. Another important feature of stock is its limited liability. It means as the owner of the stock, he/she is not responsible for the payments of the debts if the company is not able to. Owning stock means even if the company goes bankrupt, the owner of the stock will never lose his or her personal assets.
The reason why a company issues stock is that the company needs to raise money. For this the company can either sell part of itself or borrow from banks or any other financial institution which is called issuing stock. These methods of raising money are called as Debt Financing. Issuing stock is called as Equity Financing. Issuing stock is more advantageous as it does not require the company to repay or pay interest. All that the shareholders get in return for their money is the hope that the shares will be worth more some day.
It should be known that when it comes to individual stocks, there is no guarantee of safety of principal or a periodical return. Some companies may pay dividends but some may not. Without dividends an investor can make money only through its appreciation in the open market. Although risk might have negative aspects, it has its brighter side too. Greater risk is related to greater return on the investment. This is the reason why stocks can be expected to outperform other investments such as bonds, savings accounts, etc.