What are stocks and how is the value determined?

Stocks are one of the major types of investments available, along with bonds, CDS, and real estate. Stocks are fractional ownership shares in a company. People can own stock in either privately held or publicly held companies. However, stock ownership in a publicly held company is much easier to obtain and the investment is much easier to cash out than stock in privately held companies.

What are stocks?

When you own a stock or are investing in stocks, you own a small piece of a company. The percentage of ownership that a stock buys you will vary depending on how many stock shares a company makes available for purchase. For instance, if a company makes 1000 shares of stock available to be purchased and you buy 500 of them, you own 50 percent of the company. You can then have a major say in how the company is run. For most people asking what are stocks, you will be buying much smaller ownership stakes. For instance, if a company has issued one million shares of stock and you own 100 shares, you will share in the profits and losses in a small way but you will have no control over how the company is actually run.

Why are stocks issued

When understanding what are shares, you need to understand why shares are issued. Companies issue stock in order to raise capital. When a company needs money for growth, it can get it by issuing either stocks or bonds. When it issues stock, then it dilutes the ownership interest but it does not have to directly pay interest or pay the loan back. The investors will make money as the stock price goes up or lose money as the stock price goes down. However, the company does not have to pay them anything (sometimes they do, in the form of dividends). This is different than bonds, which are debt instruments that the company must pay back with interest.

Who is value determined

The value of shares is initially determined by the company when it issues an initial public offering (IPO). This is the first opportunity to buy stock. Once an IPO is issued, the value of stocks are determined by what people are willing to pay for them on the stock exchange.