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Stocks are a way to obtain a share of ownership of a corporation. They are used both as long-term investments and as speculative investments. The main reason that people set up businesses as corporations is then they can raise money by selling shares of stock. Those who own the shares have a vested interest in the corporation, and have voting rights to choose their board of directors. Once a corporation goes public, it is subject to the majority owners of stocks. This is not true of “closely held” corporations, which have stock that is owned by a small group of people. Stocks are equity capital, as opposed to going into debt by getting capital through loans. What has created a lot of pressure on corporations these days is the pressure to distribute profits as dividends. This is a way to give shareholders a quick profit without even having to sell their shares. However, by having groups of investors buy up large blocs of stock and then force the distribution of dividends can destroy the ability to invest in the corporation altogether. There are also different types of shares. Authorized shares are original shares when the corporation was formed. Issued shares have been sold to the general investing public. Outstanding stock is owned by the investing public, but sometimes a company will buy back its stock. Stock held by the company is called Treasury stock. A Company may wish to buy back its stock to limit the number of shares publicly circulating, to buy stock options for its officers and employees or to prevent a hostile takeover of the company by another company. Many companies offer stock options to employees, not just executive officers. A stock option is an option to buy company stock at a discounted price, which is usually set at the time the employee joins the company, or at a set time every year. This can be used to motivate workers to work hard and see their success as part of the company. If the company is successful, the idea is that the price of the stock will go up, and the employees will get an even better value by exercising their stock options. Stock options have an expiration date; if they are not used they are lost to the employee. They are a generally good way to inspire employee loyalty and spread a spirit of shareholder value within the company.
Article Source: http://www.financemanual.com
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