First of all I would like to remind you briefly what kinds of companies exist in our society. I suppose it’s of importance because choosing where to invest money first of all we should analyze the activity of the companies, there liability for debts if going bankrupt, the way of making decisions… On the whole we can distinguish between limited & unlimited companies according to their liability for debts. If declared bankrupt the owners of unlimited company may have to sell nearly all their possessions in order to pay their debts. As for a limited company, it’s a legal entity separated from its owners, & is only liable for the amount of capital that has been invested in it. If a limited companygoes bankrupt, it is wound up & its assets are liquidated. & if the assets don’t cover the liabilities or the debts, they remain unpaid.
Most companies begin as private limited companies & their owners have to put the capital themselves or borrow from a bank, for instance specializing in venture capital. The founders have to write a Certificate of Incorporation which states the company’s name, its purpose, its registered office or premises, & the amount of authorized share capital. In Bylaws the duties of directors & the rights of shareholders are set up. All these documents are sent to the registrar of companies.
A successful, growing company can apply to a stock exchange to become a public limited company (GB) or a listed company (US). Newer & smaller companies usually join “over-the-counter’ markets, such as the Unlisted Securities Market in London or NASDAQ in New York. Very successful businesses can apply to be quoted or listed on major stock exchanges. To paraphrase it, this gives companies a chance to have their shares traded. Publicly quoted companies have to fulfil a large number of requirements, including sending their shareholders an independently-audited report every year, containing the year’s trading results & a statement of their financial position.
So we came to what we call shares (GB) or stocks (US). What is it? It’s a type of securities. So it seems to be rather useful if I say a few words about securities in general. Security is an instrument that signifies an ownership position in a corporation (in the form of a stock), a creditor relationship with a corporation or governmental body (in case of issuing bonds), or rights to ownership such as those represented by an option, subscription right, & subscription warrant.
According to the issuer they are divided into industrial & commercial (or corporate), governmental & municipal ones. According to the holder there are registered securities where the name & addresses of the holders are entered in a register & each holder is given a share certificate; also bearer securities with the right of ownership passing by delivery & at last order securities with rights of owners to be confirmed by showing these papers.
Securities can be long term or short term, primary (like shares & bonds) & secondary (like options & warrants), & so on.
Well, at this stage I feel I should describe more carefully shares. As it said in economical dictionary a share (or stock in American English) is a security representing a portion of a nominal capital of a company. The word ‘stock’ exits in Britain English, but there it is used to refer to either a block of shares with a nominal value of £100, or various kinds of fixed-interest securities.
By the way, another name for stocks & shares is equities, because all the stocks & shares of a company have an equal nominal value.
The act of issuing shares for the first time is known as floating a company or making a flotation. Companies generally use an investment bank to underwrite the issue, or in other words – to guarantee to purchase all securities at an agreed price on a certain day, if they cannot be sold to the public.
Companies wishing to raise more money for expansion can sometimes issue new shares, which are normally offered first to existing shareholders at less than their market price. This is known as a right issue. & at last companies can also choose to capitalize part of their profit by issuing new shares to shareholders instead of paying dividends. This is known as a bonus issue.
People who own stocks & bonds are referred to as investors or respectively, stockholders (shareholders) & bondholders. When you hold a stock in a corporation you are part owner of the corporation. As a proof of ownership you may ask for a certificate with your name & the number of shares you hold. By law, no one under 21 can buy or sell stock, but minors can own stock if kept in trust for them by an adult.
A stockholder of a corporation has certain rights in proportion to the number of shares she or he owns. A stockholder has the right to vote at a company’s Annual General Meeting or for the election of directors, to receive a proportion of distributed profits in the form of dividends in good financial year or to get part of the company’s residual value if it goes into liquidation. Shareholders can sell their shares on the secondary market at any time, but the market price of a share the price quoted at any given time on the stock exchange, which reflect s (more or less) how well or badly the company is doing – may differ radically from its nominal price.
I feel like I should say a few words about the types of shares. Besides the common classification of all securities I’ve already told you about, stocks have some specific features.
1. According to the right to get dividends they can be in form of:
- preference shares (preferred stock) – ranking before ordinary shares in the payment of dividend & distribution of assets if the company goes bankrupt
- ordinary shares (US: common stock) – they are often the only kind of shares with voting rights
- deferred shares – rarely issues now. They rank last for payment of dividend after the claims of all types of shares have been satisfied.
2. According to the issuer shares can belong to:
- private limited companies
- public limited companies
3. According to qualities & values investors want the following separation takes place:
- growth stocks – shares that are expected to appreciate in capital value, they usually have a high purchasing price & a low current rate of return. Here we can distinguish between:
– high growth stocks (belonging to the companies that are clearly growing much faster than average & sell at premium, usually very risky);
– moderate growth stocks (which aren’t sold at premium, belonging to companies whose earning grow is faster than average rate for its industry, the risk of such stocks aren’t very great);
– growth stocks of companies that grow in line with the economy.
- cyclical stocks – these are stocks of companies that do not show any clear growth trend, but where the stocks fluctuate in line with the business cycle (prosperity & recession). Many people make money by predictive these waves & buying shares near the bottoms of a price cycle & selling near the top.
- defensive or income stocks that offer a good yield, but only a limited chance of a rise or decline in price.
4. According to the holder:
- bearer shares
5. According to the form of issuing:
Some companies issue participation certificates which, like shares, grant their holders part of the ownership of a company, but usually without voting rights.
There is an honorary title for a company to be called a blue chip company as it is considered to be without risk. Widely-held stocks (e.g. blue chips or 20-year Treasury Bonds) that can be considered as indicators of present & future market performance, are known as barometer (GB) or bellwether stocks (US).
There are a lot of people dealing on stock market. First of all shareholders I’ve already told you about. Shareholders place their orders with, & sometimes seek advice from stockbrokers who are members of the Stock Exchange. Brokers in turn buy shares from & sell them to market-makers, who are wholesalers in stocks & shares, & who guarantee to make a market at all times with brokers.
A special category of Stock Market participants is speculators – these are people who back the judgments they make about likely developments by buying or selling shares. The chief varieties of speculators on the stock exchange are known as “bulls”, “bears” & “stags”.
People who buy securities expecting their price to rise so they can resell them before the next settlement day are known as bulls. People who sell shares hoping to buy them back at a lower price before the next settlement day are called bears. As for stags they are people who buy new share issues, hoping to resell them at a profit (if the issue is over-subscribed).
During working hours in Stock Exchange we can also see arbitrageurs who buy stakes in companies involved (or expected to be involved) in takeover bids. & we can’t observe, but know that there can be insiders people who occupy a position of trust within an organization & possess information not known to the public & illegally make profit due to this information.
The last thing I’d like to cover concerns stock markets. I’ve mentioned this term for many times & I suppose now it’s time to explain what it meant by this word. Organized security exchanges have developed to make the buying & selling of securities easier. The securities exchanges (or Stock Markets) consist of the individual investors, brokers, & intermediaries who deal in the purchase & sale of securities. Securities exchanges do not buy or sell stocks, they simply provide the location & services for the brokers who buy & sell.
The major functions of the Stock Exchange are:
- to provide a market where investors can buy & sell securities – it helps to ensure that the price of a deal is fair
- the companies & others who wish to raise capital can easily do so at the ready secondary markets the investors’ short term savings are pooled to meet long term needs for finance from companies, the government & other organizations.
To trade on the exchange, a “seat” must be purchased. A seat is a membership. The members represent stockbrokers. As far as I understand the system of Stock Exchange when a stockbroker calls in order to sell, the member representing this broker looks for a buyer at the price requested. & when a broker calls in an order to buy, the exchange member looks for a buyer at the price offered.
One of the example of a stock market I can say is NYSE – it’s the largest & best known exchange in the USA – the New York Stock Exchange, also called the “Big Board”. There are 1300 seats on the NYSE & approximately 2000 stocks & 3400 bonds are traded daily.
Another example of well known security market is the Financial Times Stock Exchange (FT-SE) IOO (known as the ‘Footsie’) which records the average value of the 100 leading British shares, & is updated every minute during trading.
I forgot to mention that securities markets can be divided into international, regional & national (domestic) according to territory they cover. According to the number of transferring they can be primary (which issue new securities) & secondary (where previously issued securities are bought & sold).
Besides listed markets there are also unlisted or over the counter markets (OTC) where unlisted securities are sold & bought outside of the organized securities exchanges.