When a company needs funding (that is, money) for whatever reason, they have two ways to get this money aside from sales: they can either borrow funds from a financial institution, or they can issue shares.
A share of stock is a certificate of ownership of a small part of a company, which gives the
owner of the share a stake in every asset and dollar of earnings of the company. So, if you own stock of a company that pays profits on earnings, and the company is doing well, you may receive regular payments of dividends.
Share ownership also allows you a vote in the election of a Board of Directors and in other matters crucial to the company. I explained in the past how credit unions work, and with this article you can see why your initial membership of $5 in the credit union is called a share.
Are stocks and shares the same thing?
These terms are used interchangeable nowadays, but in reality they mean different things. A share is the actual certificate of ownership of a portion of the company. Stock is the accumulations of those shares.
What is the Stock Market and how does it work?
The stock market is the market where shares of many companies (and other payables, but we won’t talk about those today) are traded.
If companies are doing well in their quarterly or annual reports, it goes to reason that
ownership of shares of that company is desirable when compared to shares of others. That means that the stock will go up in value, and the number of trades of those shares will go up. By the same token, when the company is not meeting expectations and/or doing poorly, the value of that stock goes down as more people try to sell their shares.
Speculation
Oftentimes you will hear of stocks plummeting or rising even without quarterly or annual reports. The reason for this is speculation. Speculation is the sale or purchase of shares in the expectation of making a gain, or of minimizing a loss. It is why most shares are sold and bought.
Let me give a specific example. Right now there is a spreading epidemic of coffee rust, a
fungus lethal to coffee plants. The large companies producing coffee from plantations with the rust plague are going to have much smaller crops in the foreseeable future as a cure for this specific type of fungi is found and produced. Smaller crops will lead to less coffee to sell, which means less income and fewer earnings. At the same time, coffee companies in areas not affected by coffee rust will likely be doing a lot more business than usual.
However, before the reports of the yearly crop size and quality have been released, this knowledge is already circulating worldwide, and the purchase and sale of shares in those coffee companies before the reports are taking place on speculation.
Questions, suggestions? Email me at social@oasfcu.org.
Comments: use the comments section below.
No comments :
Post a Comment