Stock is a share in the ownership of a company. It represents a claim on the company’s assets and earnings.
A stock is represented by a certificate, which is the proof of one’s ownership. Being a shareholder does not mean one has a say in the day-to-day administration of the business.
Important features of the stock is its limited liability, which means that, as an owner of a stock, one is not personally liable if the company is not able to pay its debt. Owning stocks means that, no matter what the maximum one can loose is the value of his investment.
At some point a company needs to raise money. To do this, the company can either borrow from the banks or sell part of the company, which is known as issuing stocks. Issuing stocks is called “equity financing”.
Issuing stock is advantageous for the company because it does not require the company to pay back the money.
All that a shareholder gets in return for their money is the hope that the share value will appreciate and the company will earn good profit, which he is going to share.
Stock prices change due to market forces. It means prices change because of demand and supply. If more people want to buy the stock (demand) rather than sell it (supply) then the prices increase. Conversely, if more people want to sell a stock than buy it, the prices will fall.
It is difficult to comprehend, what makes people like or dislike a particular stock. Every investor has his own interpretation of news whether it is positive or negative for the company.
The price of stock does not only reflect a company’s current value, it also reflects the growth that investors expect in the future.
The value of an enlisted company, is its Market capitalization, which is the stock price multiplied by number of outstanding shares.
The most important factor that affects the value of a company is its earnings. The profit of a company is called its earning.
Analysts base their future value of a company on their earnings projection. If a company’s result is unexpectedly good (better than expected), the price jumps up. If a company’s result is disappointing (worse than expected), then the price falls.
There are factors other than earnings that influence stocks. Some believe that by fundamental analysis one can guess when to buy or sell, while others think that by drawing charts and applying studies on it and looking at past price movements one can determine when to buy and sell.
There are two major types of analysis for predicting the performance of a company’s stock. These are Fundamental and Technical analysis.