Stocks
Stocks represent ownership in publicly traded companies.
Publicly traded companies are also corporations. Corporations have limited liability relative to the activities that they conduct. Corporations were created in order to protect the assets of the owners and to separate the assets of the corporation from the assets of the owners.
Corporations can only be sued for the value of the assets. Activities conducted by corporations may not be available to us without the concept of limited liability. Dangerous activities i.e. chemical manufacture, medical services, air plane manufacture, transportation, etc. would not be possible if corporations were not granted limited liability status.
There are private corporations and public corporations. One of the largest private corporations that I am aware of is the Mars corporation – owners of M&M’s, Uncle Ben’s, Skittles, etc. Public corporation shares can generally be purchased and sold on public exchanges.
Our most commonly known public exchanges are New York Stock Exchange and NASDAQ (National Association of Securities Dealers). The most common method of monitoring the performance of publicly traded companies is monitoring stock indexes.
The most commonly monitored U.S. indexes are the Dow Jones Industrial Average (DOW), Standard and Poors 500 (S&P), and NASDAQ (QQQ). Financial markets have created derivatives which allow us to easily follow and value the most common indexes. The derivative which represents the Dow is called a Diamond (Symbol: DIA). The derivative which represents the Standard and Poors 500 is (Symbol: SPY). The derivative that which represents the NASDAQ is (Symbol: QQQ).
A derivative is an instrument whose price is derived from underlying securities. The price of the DIA is derived from the 30 stock in the Dow Jones Industrial Average. The price of a Diamond is quoted as a fraction of the Dow i.e. if the Dow is trading at 18,000 a DIA would be quoted at 180. Therefore an investor can purchase one Diamond and own a fraction of all 30 DOW stocks.
An example of an individual public corporation would be Ford Motor Company. Ford’s symbol is F. If you put F into a quote system i.e. Google Finance, Yahoo Finance, Marketwatch, Bloomberg, etc. the price at which Ford trades will appear.
Stocks which trade on the NYSE begin with one, two or three letters i.e., F (Ford), PG (Proctor & Gamble), IBM (International Business Machine). Stocks which trade on NASDAQ have symbols with four letters i.e. MSFT (Microsoft), AAPL (Apple), BBRY (Blackberry).
Public markets are wonderful because they provide us with information and the allow us to diversify. For example, if you owned 100 shares of Ford (F) and Ford traded at $10 per share, your investment in Ford would be worth $1,000. Knowing this information means you are no longer reliant upon someone else to provide you with this valuable information. If you own shares in a publicly traded corporation you can easily purchase more share or sell your shares, in addition to knowing the value of the shares.
If as an owner of shares in Ford (F) you decide that it is more prudent for you to also own some shares in technology, you cold sell some of your Ford (F) shares and purchase shares in Apple (AAPL). This is referred to as diversification.
Ownership of a Diamond (Symbol: DIA) would provide you with diversification as you would own a fraction of all 30 stocks in the Dow. The Dow has companies that provide banking, transportation, food service, technology, chemicals, retail, Insurance, etc.; this is referred to as diversification.
Ownership in publicly traded companies entitles share owners to a share in the profits of the company and the right to vote for the members of the Board of Directors and other major corporate decisions. Shares in the profits of corporations are distributed via dividends. Dividends are paid when declared by the Board of Directors. Dividends are also paid from the profits of the corporation.
The sole purpose of a corporation is to increase the value of its owners investment and to function for the benefit of its owners. Corporations change and evolve depending upon the environment in which they exist. A clever corporation that was a leader in the manufacture of Carriages would be smart to begin manufacturing automobiles (Cars) as technology evolves. Very few corporations are capable of making these transitions. The very best and successful are rewarded with higher stock prices and corporate values.
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Last updated 25 February 2015
