What is a Stock and its Benefits?
Learn about Stocks: Find out “What is a Stock and its Benefits?”
A shareholder is someone who owns stock in a company and is entitled to a portion of the
company’s residual assets and earnings (should the company ever have to dissolve). A
shareholder is also known as a stockholder. In modern financial terminology, the terms “stock,”
“shares,” and “equity” are used interchangeably. The stock market is made up of exchanges
where investors can buy and sell individual company shares.
Most finance career paths will involve stocks in some capacity, whether as an advisor, an issuer,
or a buyer
Advantages of Stock Ownership
There are numerous advantages to owning stock or shares in a company, including the
- Claim on Assets
A shareholder has a claim on the assets of a company in which they own stock. However,
claims on assets are only relevant when the company is about to be liquidated. In that case, all
of the company’s assets and liabilities are counted, and after all, creditors have been paid, the
shareholders can claim whatever remains. This is why equity (stock) investments are
considered riskier than debt (credit, loans, and bonds) investments because creditors are paid
before equity holders, and if no assets remain after the debt is paid, equity holders may receive
- Capital gains and dividends
A stockholder can also receive earnings in the form of dividends. The company can decide how
much dividends to pay in a given period (such as a quarter or a year), or it can decide to keep
all of the earnings to further expand the business. Aside from dividends, stockholders can
benefit from capital gains due to stock price appreciation.
- Voting power
Another powerful aspect of stock ownership is the right of shareholders to vote for management
changes if the company is mismanaged. A company’s executive board will hold annual
meetings to report on overall company performance. They reveal plans for future period
operations as well as management decisions. Investors and stockholders have the authority to
negotiate changes in management or business strategy if they disagree with the company’s
current operations or future plans.
- Limited Liability
Finally, when a person owns stock in a company, the nature of ownership is restricted.
Shareholders are not personally liable for any losses if the company goes bankrupt.