Lesson #4: What is Stock?

To ask “what is a stock” is the equivalent to asking “what is a U.S. dollar”? While inherently the question may seem both primitive and elementary, the answer can be expressed on many levels. In its most basic definition, a stock is a printed form that represents a symbolic portion of a publicly traded company. If you own 1% of the number of the outstanding shares of stock, you technically own 1% of the company’s assets – 1% of all the chairs, 1% of all the computers, 1% of all the inventory, etc. Inherently, stock represents an intrinsic value in a company and therefore carries the symbolic value in every transaction.

Looking beyond the elementary explanation, it’s a good idea to understand that the value of a stock will never be static. Just as while the U.S. dollar may appear static in value, in actuality it is constantly changing in value through inflation and in respects to other world currencies. Likewise, stock’s value constantly changes through dilution (when a company issues more stock) and in respects to investor sentiment as to how the company is performing. Ultimately, the simple underlying rule is that the more money a company earns then the more valuable its stock becomes. This is why it’s a good idea to be aware of the company’s past performance through its financials and of its future performance which is often announced through official press releases.

When a company goes public (decides to enter into the stock market), there are many reasons for which they might be willing to do this. The most common reason is the idea that the company wants to raise capital at the expense of management’s portioned control over the company. Other reasons might include the need for liquidity enhancement, employee incentive options, and even a smooth exit strategy for insiders. The end result in either case is the introduction of a company-based security that retains both a symbolic and market value.

Stock’s trading value (or market value) will typically differ from the representative value. Trading value is essentially what someone is willing to pay for the particular stock. It is the approximate value one sees on the stock ticker. When a person trades stock, they are not trading against a computerized calculator but with actual people who are willing to sell or buy various amounts of shares at arbitrary prices. In every trade, the “bid” is what a person is willing to buy company stock at whereas the “ask” is the price at which a person is willing to sell company stock. The value that comes across on the stock ticker is the last transaction price of when two parties’ bid and ask matched each other. While the prices might’ve matched, the amounts might not have correlated. This is why some transactions go as “partially filled” since there might have been a limited number of shares that a person was willing to sell or buy at the specific price.