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What is a Stock?

What is a Stock?

May 21, 2021
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Welcome to the Weekly SUMmary - 05/21/2021

Today, and in the coming posts (not necessarily sequentially, depending on news/current events, etc) we will be discussing different types of investments. The topic of this post... Stocks.

Let's begin with the definition. Merriam-Webster defines stock (the investment) as:

athe proprietorship element in a corporation usually divided into shares and represented by transferable certificates
ba portion of such stock of one or more companies

Merriam-Webster also goes on with 13 other definitions (I had no idea there were so many uses/definitions) for the word here https://www.merriam-webster.com/dictionary/stock.

Now, let's interpret that definition.

Basically what an investor does when they purchase a stock is give a publicly traded corporation (or private but this is not what will be discussed, we are dealing with the open market) money in exchange for a fractional ownership in the corporation. The more money one exchanges, the more ownership may be available to the investor. This ownership can range from fractions of pennies (penny stocks/Over The Counter [OTC]/unlisted) to hundreds of thousands of dollars (see Berkshire Hathaway Class A shares) for a share. This is a way for corporations to gain funding for expansion or current productivity.

For example, let's look at ABC Corp. ABC Corp produces widgets. ABC Corp has been in business for a short period of time and has been quite successful. ABC Corp typically produces 100 widgets a day. ABC Corp receives an order for 1,000,000 widgets. ABC Corp realizes it cannot produce 1,000,000 widgets in a short amount of time and decides it needs to scale infrastructure quickly. ABC Corp decides to sell shares of it's company on the open market in order to obtain enough funding to increase production by 100 times. Although this will take some time, ABC Corp has a great product that is sustainable and will take others time to come to market (currently no competition), so they release an Initial Public Offering (IPO) for shares of their company in order to fund the expansion. The expansion allows them to produce 10,000 widgets a day and, upon completion of their expansion, will fulfill their 1,000,000 part order within 100 days.

There are a variety of ways to interpret or consider this investment. Technically speaking, this is equity/ownership, as one will "receive" ownership in the corporation. I put "receive" in quotation marks because corporations used to issue certificates for these share, but in present day this is typically indicated by a line item on a ledger with an investor's name next to their holdings. Depending on if one views this corporation as something they would like to own forever, one could view this as a loan to the corporation. Loans/credit is typically issued in another fashion, which will be addressed in a future post. The reason this could be viewed as a loan is that most investors will buy and sell stocks throughout time and rarely hold one corporation into perpetuity. Even if one held the stock as long as they could, the shares would typically pass to an heir who may end up divesting of their shares, therefore it was just a longer term loan.

Investing is a complex topic to discuss. This is why there are those of us that study and become licensed to broker (buy/sell) investments. This is just the surface of how to invest in stocks/corporations. To learn more, research or speak to a professional.

In the meantime, "Do SUMthing smart with your money."

This blog is meant to be educational in nature. Although references were made, much of the information has been obtained and relayed through experience in the financial industry, licensing education and exams, and continuing/advanced education. There is always a risk when investing in stocks, including the potential to lose principal. Generally, the greater the risk, the greater the potential reward. You should determine your risk tolerance and financial goals before deciding to invest. Always consult a professional before making investment related decisions.  (05/21)

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