Finance Terminology - I

Finance Terminology

Recently, I developed a curiosity to learn about Stock Market and trust me it is worth spending time on this topic and you will also develop an interest for sure, once you start reading about it.

In this series of blog, I am going to explain you about the Stocks, their Identifiers and many more terminologies related to Stock Markets which are used heavily in the Stock Market.

Stock:

A Stock is a type of security that signifies an ownership in a company and can claim on the company assets and earnings. Stocks are also known as ‘Shares’ or ‘Equity’.

There are mainly two types of Stocks:

      ·         Common Stock

      ·         Preferred Stock

Common Stock:

      1.       Equity, an ownership in a company.

      2.       Payouts to stocks are basically dividends, in two forms:

    ·         Cash Payout

    ·         Stock Payout

      3.       Payouts are uncertain in magnitude and earnings. Depends on the company's earning.

      4.       Equity can be sold to any entity whether it is a private or public.

Key Characteristics of Common Stock:

·         Residual claimant to corporate assets (after bondholders, preferred stock holders and other debtholders are paid).

·         Limited Liability: It is an advantage as shareholders will be responsible for the debts of company only to the extent of value of their shares.

·         Voting Rights: Elects a board of directors and votes based on corporate policy.

·         Access to public markets and ease of shortsales.

Short-Selling:

Short selling is a key concept, which makes it possible to sell stocks or instruments what one does not own. In simple terms, this concept allows you to borrow some stocks or instruments from your lender and sell (here sell is basically referred as short sell) it at current market price. Once the market price for that stocks or instruments declines, you buy it again and return it to the lender. The overall difference between the price at which you sold and purchased the stock or instrument defines your profit/loss for that short sale.

Preferred Stock:

Preferred Stock as compared to Common Stocks has higher claim on the assets or earning of the companies. In simple terms, dividends payout preference will be given to Preferred Stocks as compared to Common Stocks.

Preferred Stocks combines features of debt that means dividend payout will be fixed. It also doesn’t have any voting rights.

In the Next part, we will discuss about the Equities and Asset classes.