Definition of Stocks
Every business requires money or capital to run. Not all businesses are sole proprietors. In other scenario businesses are run by borrowing money and injecting in the business. Such one type of capital injection is through stocks. Stock is a type of security that claims the investor’s ownership or his part in business assets or earnings. For example if an investor has 100 share in company of total equity 10000 then his right is to claim 1% of the company’s assets.
Brief Explanation of Stocks
Stocks normally comprise of equity shares. Owning shares in a company gives rights to investors to vote about the decisions of the company, share in profit in the form of dividends.
Stocks or shares have two types in general.
- Common Stocks or shares
- Preferred Stocks and shares
Common Stocks or shares:
- They have right to exercise their voting right during the important corporate decision time.
- However, at the time of liquidation, they are not given preference to receive back their invested amount. They receive residual amount after all debt and other senior claims have been paid off.
Preferred Stocks and shares
- Preference shareholders normally have fixed dividends.
- They do not have the voting right.
- During the time of bankruptcy, they are entitled to receive their share of amount in preference.
- Preference shareholders also receive their dividends before common shareholders.
The other main type of capital raising is through debts.
- These are mainly the bank loans and borrowings. The bank lends money and charges interest on that amount.
- Business is required to pay back the loan and interest in time else penalty is applied.
- In case of default, bank have right to seal the business.
- During the liquidation of business debt and borrowings are paid on the most priority.
Businesses are required to maintain a balanced blend of equity and debt capital in the business because both have their pros and cons.