What is a stock? – Beginner Series

Welcome to the new beginner series that I decided to start after realizing there were a lot of people who were not aware of even the basics, such as the definition of a stock. You have to start somewhere. It seems fitting to start with the definition of a stock, because there is a subtlety that even people familiar with investing might not appreciate. Not that it is important or particularly interesting, but it is true, which counts for something.

The beginner series will all be under one category, aptly named beginner series, and two tags, “what is” and “concepts.” The two will be intertwined, but “what is” will focus on something specific. Concepts is where I get to discuss more advanced things. I will probably have a theory tag at some point, but that won’t be beginner. Now lets discover what a stock is.

Do you mean stock or share?

When people use the word stock they usually mean shares of stock. You do not own 100 stock of IBM. You own 100 shares. Stock refers to the equity of a company. The sum total of ownership that includes things like voting rights and rights to residual assets after other senior claimants. Bondholders,  as an example, have a superior claim than a shareholder on the assets in the event of a liquidation. More on that in another article.

Shares of stock is the unit that you actually buy. You have a piece of the equity in a company. In the past it used be much easier figuring out what your rights are as a shareholder. Now there is all kinds of funny business involved. One share, one vote is dying. Nowadays a small group seeks to control the company, and control the ability to assign control. The broader shareholder community is along for the ride. You have a right to assets but not the right to guide the company.

Do not have a knee jerk reaction to this. As an investor who is in it for the money not divesting control might work. If shareholders have too much power they might install new, short-sighted management. If you are investing for retirement and you are 30 it could be good to not have some career executive come in and entrench the company on the road to obsolescence. Nice immediate rewards but long-term the company is headed for the bin. Judge it on the results, and if the results are always negative then the practice should be labeled as terrible and avoided.

Summation

When people are talking about owning stock or trading stock they are talking about shares. These terms have become interchangeable for the most part. However, a share represents a unit of equity in a company, and the totality of that equity is the stock of a company.  You can actually get by pretty effectively without knowing this, but since advanced investors use both terms beginners might get confused. What is the difference between a stock and a share? In common speech, probably nothing. The specifics show that a share is a subset of the stock, but in conversation there is hardly a difference.

This is just the inaugural piece, and is therefore mostly symbolic. Future posts will be about topics that might be new to people or confusing.