Stock

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What is Stock?

A stock is a financial instrument that represents ownership in a company or corporation and a proportionate claim on its assets and earnings. Stocks are also called shares or equity.

Owning stock means that a shareholder owns a slice of the company equal to the number of shares held as a proportion of the company’s total outstanding shares.

An individual or entity that owns 100,000 shares of a company with one million outstanding shares would have a 10% ownership stake in it.

What Is a Stock Exchange?

Stock exchanges are secondary markets where existing shareholders can transact with potential buyers. Corporations listed on stock markets do not commonly buy and sell their shares but may engage in stock buybacks or issue new shares but these transactions occur outside of the framework of the exchange.

Largest Stock Exchanges

The first stock markets appeared in Europe in the 16th and 17th centuries, mainly in port cities or trading hubs such as Antwerp, Amsterdam, and London. In the late 18th century, stock markets began appearing in America, notably the New York Stock Exchange (NYSE), which allowed for equity shares to trade.

The NYSE was founded in 1792 with the signing of the Buttonwood Agreement by 24 New York City stockbrokers and merchants. Before this official incorporation, traders and brokers would meet unofficially under a buttonwood tree on Wall Street to buy and sell shares.

Over-the-Counter Exchanges

There also exist several loosely regulated over-the-counter (OTC) exchanges, which may also be referred to as bulletin boards (OTCBB). These shares tend to be riskier since they list companies that fail to meet the more strict listing criteria of bigger exchanges. Larger exchanges may require that a company has been in operation for a certain amount of time before being listed and that it meets certain conditions regarding company value and profitability.

Stock Market Indexes

Indices represent aggregated prices of several different stocks, and the movement of an index is the net effect of the movements of each component. Major stock market indexes include theDow Jones Industrial Average (DJIA) and the S&P 500.

The DJIA is a price-weighted index of 30 large American corporations. Because of its weighting scheme and the fact that it only consists of 30 stocks (when there are many thousands to choose from), it is not a good indicator of how the stock market is doing.

The S&P 500 is a market-cap-weighted index of the 500 largest companies in the U.S. and is a much more valid indicator.