What Are Stocks?
Understanding the Foundation of Equity Investing
Begin your journey by understanding stocks—the fundamental building blocks of equity investing. Stocks represent shares of ownership in a company, granting investors a claim on its assets and earnings.
Equity Ownership
Owning a stock means you own a piece of the company.
1Share of the Pie
Each share represents a fraction of a company's total equity. If a company has 1 million shares and you own 1,000, you own 0.1% of the company.
2Voting Rights
Common shareholders typically vote on key corporate decisions like board elections, major acquisitions, and executive compensation.
3Dividends & Capital Gains
Investors can earn income through dividends (quarterly payments) or profit by selling shares at a higher price than they paid.
Classes of Stock
Common Stock:
Standard shares with voting rights and variable dividends.
Preferred Stock:
Fixed dividends, priority over common shares in bankruptcy, usually without voting rights.
Note: Preferred shares act like a hybrid between stocks and bonds—offering income stability but less upside potential.
Market Capitalization
Market capitalization ("market cap") measures a company's total value on the stock market.
Market Cap Formula
| Category | Market Cap Range | Typical Traits |
|---|---|---|
| Large Cap | >$10 billion | Stable, lower volatility, often pay dividends |
| Mid Cap | $2 billion–$10 billion | Growth potential, moderate risk |
| Small Cap | $300 million–$2 billion | Higher growth prospects, higher volatility |
| Micro Cap | <$300 million | Speculative, less liquid, highest risk |
Investment Tip: Investors often mix across caps to balance growth and stability in their portfolios.
How Companies Raise Capital Through Stock Offerings
Companies issue stocks to raise money for expansion, R&D, or debt repayment. Major offerings include:
Initial Public Offering (IPO)
Companies sell shares to the public for the first time.
Example: When a private company "goes public" to raise capital and allow early investors to cash out.
Follow-On Offering
Existing public companies issue additional shares to fund new initiatives.
Also called Secondary Offering. Can dilute existing shareholders.
Private Placement
Shares sold directly to institutional or accredited investors without a public listing.
Faster and less expensive but limited to qualified investors.
Rights Offering
Existing shareholders receive rights to purchase new shares at a discount before the public.
Helps maintain ownership percentages and raises capital from loyal shareholders.
| Offering Type | Investor Access | Purpose | Cost to Company |
|---|---|---|---|
| IPO | General public | Fund growth, gain liquidity | High (underwriting fees) |
| Follow-On Offering | General public | Raise additional capital | Moderate |
| Private Placement | Accredited/Institutions | Quick fundraising, less disclosure | Low |
| Rights Offering | Existing shareholders | Maintain ownership levels | Low–Moderate |
Each method carries trade-offs in cost, disclosure requirements, and shareholder dilution.