What is Stock?
A share of stock in a company is a share in the
ownership of that company. Someone who owns
stock in a company owns a part of the plant, the
equipment, and all the raw materials and finished
products on hand plus any property owned by the
company.
Here is an example of how stock comes into being.
Jane Hughes owns a business making bicycles of her
own design in her own shop. Bicyclists like her bicycles
so much that they tell their friends about them. Soon
there is a demand for more bicycles than Jane can
supply. She would like to buy a bigger shop and
expand her business. She has $5,000 in the bank, but
that isn't enough to buy all the things she will need to
set up a small factory to make bicycles. She decides
to find some people who are willing to invest their
money in her bicycle business. In exchange for
investing their money, they will receive a share of the
profits from the sale of the bicycles.
Jane Hughes finds nine people who believe her
bicycle business can be profitable, and each agrees
to invest $5,000. This means that there is $50,000
(including Hughes' $5,000) to build and equip a small
factory. By investing in the bicycle plant, these 10
people, including Jane Hughes, have become owners
of stock, or stockholders. A stock certificate is issued to
each investor. It states that each is the owner of $5,000
worth of common stock in the Hughes Bicycle
Company.
As stockholders, these 10 people have certain
privileges. One is the right to see the company's
records showing money received and spent. Another
is the right to elect a board of directors responsible for
deciding company policies. They elect a group of
directors among themselves and name Jane Hughes
president of the company. The stockholders also
expect a share in the company's profits by receiving
payments called dividends. The board of directors
decides how much of the profits should be put back
into the business and how much should be paid to the
common stockholders in the form of dividends.
After a period of successful business activity, Jane
Hughes learns that an opportunity arises to buy a
company that manufactures skateboards. The board
of directors of Hughes Bicycle Company wants to buy
the
skateboard company because they think it will give the
Hughes Company another product to sell which will
help the company grow. In order to raise enough
money to buy the Skateboard Company, Hughes'
directors decide to issue more stock; but instead of
common stock, they issue preferred stock. They give the
preferred stock to the owners of the Skateboard
Company instead of cash in exchange for the plant,
equipment and goods on hand.
As long as the business is doing well, stockholders with
preferred stock receive a regular income in the form of
dividends. Dividends will be paid to preferred
stockholders before the board of directors approves
any dividends for the common stockholders. The term
"preferred" is used because preferred stockholders are
shown preference in the payment of dividends. Unlike
common stockholders, however, owners of the Hughes
Company's preferred stock ordinarily do not have any
voice in the management. They cannot vote for
members of the board of directors who decide
company policy.
Stocks may be purchased and sold in a variety of ways.
For example, one of the original common stockholders
of the Hughes Company may decide to sell his shares
for cash. Since the Hughes Company is still fairly small
and not widely known the shares are sold in the town
where the company is located in what is called the
over-the-counter market. The over-the-counter market
is not a place. It is just a way of buying and selling stock
in small companies by private bargaining instead of by
public auction. The price of the shares sold in the overthe-counter market largely depends on how much
buyers are willing to pay for the stock and how cheaply
the owner is willing to sell. The buying and selling price
at any given moment is often a compromise between
the highest price a buyer is willing to pay and the lowest
price for which the owner is willing to sell. This is also one
of the factors that influence the price of stock if it is sold
by public auction or at a Stock Exchange. For example,
if the Hughes Company continues to grow and issues
more stock, in time it might ask to be listed on the
Toronto Stock Exchange. By paying a yearly fee and
meeting certain other requirements, the Hughes
Company is entitled to have its stock bought and sold,
or traded at the exchange. All trading is done through
brokers who are
members of the exchange and who function under
rules intended to assure that trading will be fair,
honest, and free from manipulation. The price at
which stocks are bought and sold in this situation can
be a compromise between the highest price a buyer
is willing to pay and the lowest price for which the
owner is willing to sell but, other factors such as supply
and demand, the impact of current national or
international events on a company and/or the
popularity of items manufactured by a company are
other factors that can influence the price. Price can
also be affected if a company decides to split their
stocks. For example, if the value of Hughes Bicycle
Company stocks increases dramatically they may
become too expensive for the average buyer. The
company may then decide to split the stock meaning
that the price of individual stock decreases. This
enables a greater number of ‘average buyers’ to
purchase the stock and potentially increases the
number of stockholders. (See Stock Splits)
Any person who is over 18 can buy stock.
However, the actual buying and selling at one of the
exchanges is done by a broker, who acts as an
agent or representative for the people who want to
buy and sell stocks. The broker carries out his
customers' orders in exchange for a small
percentage of the sale or purchase price, known as
a commission. The size of the commission depends
on the size of the sale.
In addition to trading stocks, brokers may also trade
bonds. Unlike stocks, whose price can vary on a daily
basis, a bond is a note of a corporation or of the
government, promising to pay the holder a fixed
amount of money by a specified date, plus a stated
amount of interest.
The person who wants to invest should also read the
financial pages of a daily newspaper; decide which
industries seem to be growing and which companies
are the leaders in their fields, and then find out all
possible information about their financial condition.
A broker can help by supplying information on the
various companies of interest. Once a choice has
been made, the broker will carry out the investor's
orders and purchase the stocks.
The Toronto Stock Exchange is located in a building
that serves as a marketplace for stocks and bonds on
Bay Street in Toronto. The stocks of approximately
1,700 of the largest corporations in Canada are listed
and traded there. In order to be listed, an industrial or
oil and gas company must have at least one million
shares of stock owned by at least 300 people, each of
who own at least 100 shares. A share is one of the
equal parts into which the stock of a corporation is
divided. Each share of stock entitles its owner to a
proportionate amount of the corporation annual profit
in the form of a dividend. The company must publish
financial statements showing the exact condition of
the business every three months, and it must meet
certain other rules set by the exchange.
People invest in stocks for many reasons. The main
reason is that they think they will be able to earn
more money through their investment. However,
sometimes people lose money on their investment.
Therefore, to make as good a decision as possible
about what stock to buy, it is important for the buyer
to have good information about the company
whose stock is for sale. A person who wants to buy
stock should contact a broker for assistance in
deciding on one or more good companies.
The type of stock, the time to buy, and the time to
sell are entirely the decision of the investor. A wise
investor will continue to keep informed by reading
newspapers and magazines so that the stocks
purchased will continue to fit the investor's needs.
Bulls, Bears & Splits
Bulls and Bears:
No discussion of the stock market would be complete without some mention of
"bulls" and "bears".
A "bull" is an investor who expects the market, or a specific stock, to go up.
A "bear" is an investor who speculates that the market, or
a particular stock, will go down.
How the terms "bulls" and "bears" originated is not
completely certain. However, it is thought that these terms were derived from
the gestures the two animals display when fighting. Animal observers note that
a bull lowers its head and tosses its enemy up in the air, while a bear is known to
rake downward on its prey with its deadly claws. From these gestures, it has come to mean that a
"bull market" is one that is going up and a "bear market" is one that is going down.
Stock Splits:
If the market value of a stock increases dramatically, company directors may decide to split the
stock. In a stock split, the company gives you more shares, but lowers the price of each share. If a
stock splits 2-for-1, the price of the stock is cut in half and stockholders are given twice as many
shares.
A stock may split 2-for-1 or 3-for-5, and so on. To compute a 2-for-1 split, multiply the number of share
by 2, then divide the price per share by 2. In a split situation, it is important to remember that the
stockholders' ownership position remains the same because all other shareholders would likewise
have twice as many shares.
The initial effect for the stockholder, then, is no different than trading a dime for two nickels. The
longer-term effect is that now there are twice as many shares available to buy in the market at half
the price. Also, the total value of the stock has not been affected, nor has the earning power of the
corporation been diluted. A split is usually taken as a signal from management that the company is
doing well; it communicates enthusiasm and optimism about the future.
Stock Market Game Vocabulary
Annual Report - A report issued by a corporation covering the previous year's activities, financial statement and
future prospects.
Assets - Everything a corporation owns or is due to it.
Bay Street - A street in Toronto; the major financial centre in Canada.
Bear - On Bay Street, someone who believes that prices will go down.
Bear Market - A market that is going down.
Board Lot - 100 shares, the usual trading unit for shares
Block - A large amount of stock, usually more than 10,000 shares.
Blue Chip - The common stock of a highly respected company known for paying dividends in both good and
bad years.
Bonds - A note of a corporation or of the government, promising to pay the holder a fixed amount of money by
a specified date, plus a stated amount of interest. It represents the debt of a company.
Broker - Someone who acts as an intermediary between a buyer and seller and charges a commission for the
service.
Bull - On Bay Street, someone who believes that prices will go up.
Bull Market - A market that is going up.
Capital - Wealth invested or available for investment.
Capital Gain - The profit from the sale of a security or other asset at a price above its cost.
Capital Loss - Loss due to selling securities for less than was paid for them.
Commission - A broker carries out the customer's orders in exchange for a small percentage of the sale of the
purchase price, known as a commission.
STOCK MARKET GAME
Commodities - Grains, such as wheat and corn, and other bulk items such as coffee beans, sugar or pork
bellies, also natural resources such as silver, all of which are traded by investors at various special exchanges.
Common Stock - Securities which represent an ownership interest in a corporation.
Conglomerate - A corporation formed by the merger of many firms producing entirely different products.
Corner - Ownership of a sufficient number of shares to influence the price of a given stock.
Dividend - A payment to stockholders of a corporation from the corporation's earnings.
Earnings - Money left to a business after all expenses have been paid.
Equity - Ownership of preferred and common stock in a company.
Holding Company - A corporation created to own enough stock in other companies to give it control of those
companies.
Monopoly - A company that controls an industry or public service.
Mutual Fund - An investment company that sells shares of itself to the public and invests money in securities,
thereby giving small investors an opportunity for diversified investment.
Odd Lot - A number of shares fewer than the usual trading unit of 100 shares.
Option - The right to buy or sell something within a specified time and at a specified price.
Overbought - The opinion that too active buying has boosted a stock or the whole market too high.
Oversold - The opposite of overbought; the opinion that too active selling has forced a stock or the whole
market too low.
Paper Profit - If a stock climbs from 70 to 74, the four-point profit is a profit on paper only until the shares are
actually sold at 74.
Portfolio - A list of securities owned by an individual or an institution.
Preferred Stock – A certificate of ownership that ranks ahead of common stock but after bonds in claims on
earnings.
Principal - (1) A person's capital; (2) the face value of a bond; (3) the customer for whom a broker buys and
sells; (4) an individual trading for his/her own account.
STOCK MARKET GAME
Prospectus - A circular put out by a company describing itself and the securities it plans to sell to the public. The
prospectus must be submitted to the various provincial regulatory bodies for approval. In Ontario the provincial
regulatory body is the Ontario Securities Commission.
Rally - The recovery of prices after a decline.
Round Lot - The standard unit of trading securities, usually 100 shares.
Security - A document of ownership; for instance, a stock certificate.
Selling Short - Selling stocks that are not in the seller's possession in the hope that the market will decline by the
stated delivery date, at which time the seller will actually buy the stocks needed at a lower price but deliver
them for the higher price.
Share - One of the equal parts into which the stock of a corporation is divided. Each share of stock entitles its
owner to a proportionate amount of the corporation's annual profit in the form of a dividend.
Stock (Common) - Certificate of ownership in a corporation. A holder of common stock is an owner of the firm
and receives income in the form of dividends, which can vary from year to year.
Stock (Preferred) - A certificate of ownership that ranks ahead of common stock but after bonds in claims on
earnings.
Stockholder/Shareholder - The individual owners of a corporation are called stockholders or shareholders. They
are not liable for the corporation's obligations; all they have risked is what they paid for their shares.
Tax-Exempt Bonds - Securities issued by public authorities such as a country or province on which the interest is
entirely or partly free of federal income tax.
Ticker Symbol - A combination of letters representing a stock: DIS, Disney.
Toronto Stock Exchange (TSX) - Canada's largest and leading marketplace for securities.
TSX 300 Index - A statistical average indicating the market price of representative stocks.
Yield - The return on investment. Yield is figured on a stock by dividing the amount of dividends paid in the
previous 12 months by the market price at the moment (or by the price paid for the stock).
How to Read the Stock Tables in The Newspaper
1
Name
ABC Inc.
2
Volume
3000
3
High
32.25
4
Low
30.25
5
Last
31.90
6
Chg
+1.65
1. Name: Company name; may be abbreviated
2. Volume: Number of shares traded during the day in 100’s
3. High: Highest trading price reached during the day; prices are in dollars
(e.g., 32.25 =$32.25)
4. Low: Lowest trading price reached during the day; prices are in dollars
(e.g., 32.25 =$32.25)
5. Last: The last trading price recorded when the market closed the previous day
6. Change: Change in dollars and cents between day’s close and previous day’s close