An investment in stocks, formally referred as equity investing, represents purchasing an ownership stake in a corporation. When someone purchases a stock they are buying a claim on the company’s assets and earnings.
When a corporation needs to raise capital to expand the business, they sell treasury shares and issue a stock certificate for those shares to investors. The actual physical exchange of a stock certificate is rarely done now, as the clearing network for the stock exchanges—where shares trade—are now fully electronic. However, when the investment dealer, who acts as agent or principal for the issuing corporation during a financing (which can take place as an Initial Public Offering or Private Placement) exchanges the net proceeds of funds raised, a single stock certificate is issued and then deposited at the central clearing network. These shares are issued in “street name” and then the broker credits the account of the participating clients. Prior to the transition of stock markets from analog to electronic, an investor would have been issued a stock certificate in their name and this certificate would need to be produced to sell the shares. By becoming electronic and issuing shares in street name, the secondary buying and selling of stocks has become simplified.
Once a stock certificate has been created and listed on an exchange, and after any regulatory hold periods (if any) expire, these shares become free trading on the secondary market. Some secondary markets include the New York Stock Exchange, London Stock Exchange, Tokyo Stock Exchange and the Toronto Stock Exchange. Free trading stock can be bought and sold by investors. The process of buying and selling stock on an exchange does not add any capital to the corporation’s accounts, but is transacted between different investors.
There are different classes of stock: voting, non-voting (both referred to as common stock), and preferred shares. Each voting share held by an investor allows that investor to vote once at the Annual General Meeting of the corporation where issues such as selection of the Board of Directors, executive compensation, stock option plans, and other issues are discussed and decided. Different classes of stock carry different risk levels, due to their subordinated claim on assets. All equity classes are subordinated to the fixed income (debt) investors. This means that should a corporation be liquidated, the bond holders would receive first claim on any funds raised from the liquidation. Preferred shareholders have the highest claim of equity investors, followed by the common stock investors. The subordinated nature of equity investments causes stocks to have a higher risk profile than debt investors, but the returns to equity investing are higher than on debt instruments.
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