Beginners Guide To Stock Market Basics

Companies are started by individuals or maybe a small circle of people. They pool their money or obtain loans, raising funds to launch the business. A choice is made to organize the business as a sole proprietorship where one person or a married couple owns everything, or as a partnership. Later they may choose to "incorporate". As a corporation, the owners are not personally responsible or liable for any debts of the company if the company doesn't succeed.

Corporations issue official-looking sheets of paper that represent ownership of the company. These are called stock certificates, and each certificate represents a set number of shares. The total number of shares will vary from one company to another, as each makes its own choice about how many pieces of ownership to divide the corporation into. One corporation may have only 2,500 shares, while another may issue over a billion shares such as IBM and Ford Motor Company.

Companies sell stocks (pieces of ownership) to raise money and provide funding for the expansion and growth of the business. The business founders give up part of their ownership in exchange for this needed cash. The expectation is that even though the owners have surrendered a portion of the company to the public, their remaining share of stock will become increasingly valuable as the business grows.

Corporations are not allowed to sell shares of stock on the open market without the approval of the Securities and Exchange Commission (SEC).

The Golden Piggy Bank - This transition from a privately held corporation to a publicly traded one is called going public, and this first sale of stock to the public is called an initial public offering, or IPO. Usually an IPO is sponsored by an investment bank (the underwriter) such as Merrill Lynch, Salomon-Smith Barney, or Goldman Sachs.

Stock Market Types

Common Stock - standard shares issued by a corporation. Most stocks traded are common stock.

Preferred Stock - special class of stock that is issued without voting rights, but promises a fixed dividend. If a company is forced to liquidate and close its doors, preferred shareholders stand in line in front of common stock holders, for any proceeds available after secured creditors are paid. Most preferred stock trades on the NYSE at about $25.00 per share.

How to Buy and Sell Stocks