STOCK

Stock is a form of ownership interest in a company and a way for companies to fund their growth. A share of stock in a company represents a fraction of ownership or equity in that company's assets and growth. In exchange for giving the shareholder a piece of ownership, the shareholder takes the risk that the earnings of the company will decline, which could reduce the value of the shareholder's initial investment. The buyer of a company's stock is willing to take this risk because if the company's earnings grow rapidly the stockholder gets to share proportionately in that wealth. For example, an investor bought $1000 of stock in Digital Equipment Corporation in 1991 saw the investment fall in value to $651 by 1996. But an investor who invested $1000 in the stock of EMC Corporation in 1991 saw that investment increase to $18,700 five years later. Some investors prefer investing in bonds because bonds assure them of a specific return on their investment. No bond, however, can promise the eighteen-fold growth EMC gave its stockholders between 1991 and 1996.

There are two basic forms of stock: common and preferred. In addition to an ownership stake in the company, common stock, also called "ordinary shares," entitles the shareholder to periodic payments of dividends, which are a share of the company's earnings, as well as a claim on the assets of the company if it goes bankrupt. Most common stock also gives the shareholder a right to vote on changes in the company's bylaws, on the election of corporate directors, and on any mergers with other companies. Holders of preferred stock usually do not have the same voting rights as common stockholders, but if the company goes bankrupt their share in its assets must be paid first before common stockholders receive their assets. Finally, the dividends that common stockholders are paid depend on the company's actual earnings, whereas preferred stockholders are always guaranteed a fixed dividend.

The practice of selling shares of stock arose as a way for companies to raise large amounts of capital for their projects. For example, the joint stock companies that took the financial risk of settling the New World did not need to rely only on banks or governments to raise funds—they could have raised the money they needed by selling shares to investors. Even in the late twentieth century many new companies started out as privately owned firms with a few owners and grew through bank loans or the investments of a few private investors. Many private firms reach a point in their growth where the only way to fund the massive investments they need to continue growing is by "going public," that is, to sell a stake in their ownership of their company to the broad public. In 1995, 107 billion shares of stock changed hands, and by 1997 the total value of all the stock traded on the New York Stock Exchange alone was $7.6 trillion.