DEFINITION: The word “stock” is short for “capital stock,” which signifies an ownership share in a corporation or other commercial enterprise.
ETYMOLOGY: The word “stock” derives, via Middle English, from the Old English word stocc, meaning “stick,” which in turn is connected to the Old High German word stoc, with the same meaning.
The original meaning of “stick” mutated over time to assume such new meanings as a “stump,” a “block of wood,” the “trunk of a tree,” a supply or inventory of goods, as in “livestock,” and, finally, “capital.”
USAGE: To own a “stock” is to own a piece, part, or share in a business.
The management of companies—mainly in the legal category of “corporation”—may decide to “take the company public” by offering shares on the open market.
Such an offering is also known as an “equity issue.” The purpose of an equity issue is to raise capital.
Purchasers of stock, known as “stockholders,” own a fractional share of the issuing company.
That is, if the Acme Widget Company issues 100 shares of stock, which are all purchased, and if Mr. Jones buys 10 shares, then Jones owns 10/100, which is to say ten percent, of Acme Widget.
This has two consequences for Jones:
- He will be entitled to receive ten percent of any distributions or profits (“dividends”) paid by the company to its shareholders
- He has ten votes to cast in any election or other vote on policy within the legal competency of the shareholders
Public stock companies trace their origin back to the Roman Republic. However, they became economically highly significant during the rise of capitalism in northern Italy during the Age of Exploration.
In 1602, the Dutch East India Company issued shares of capital stock which could then be traded on the Amsterdam Stock Exchange. This innovation greatly expanded the market for shares, because they could be liquidated on the open market much more easily.
During the twentieth century, the nature and complexity the many types of publicly traded stocks expanded exponentially.
The two most basic kinds of stock are “common stock” and “preferred stock.”
In spite of what one might think from the terminology, it is common stock which affords the greater privileges, permitting both dividends and voting rights.
Owners of preferred stock, in contrast, may receive dividends, but do not have voting rights.
A more recent and sophisticated type of security connected to stocks is known as a “derivative.”
A derivative is any negotiable instrument which is based on an underlying asset that consists of stocks.
Among the many different kinds of derivatives, we may mention “futures” and “options.”
A stock future is a contract which obliges one party to buy stock upon a future date (the contract’s “maturity”), and the other party to sell on the same date, regardless of the prices prevailing on that date.
In the technical jargon of the financial industry, the futures buyer is said to be “long” (with an obligation to buy), while the seller is “short” (with an obligation to sell).
In contrast, an option is the right (note: not the obligation) to either buy or sell stock in the future at a price fixed in advance.
A right to buy is also known as a “call” option, while a right to sell is known as a “put” option.