De-jargoned | Stock

De-jargoned | Stock

What is it?

It is a security issued in the form of shares that represents ownership interest in a company. Say, you need Rs1 lakh to start a business or expand an existing one. You can divide this Rs1 lakh into 10,000 pieces, each carrying a price tag of Rs10. Instead of buying a large chunk of a business, investors have the option of buying parts of it. If an investor buys 100 pieces of this offer, he has a 1% business share. The risk of the investor is limited to the amount he has invested.

How is it valued?

A stock is valued according to the fundamentals of the company. It is a price that investors are ready to pay, factoring in the quality of management, company and government policies and sector growth, among other factors.

Where can you buy or sell?

When a company offers shares for the first time, it is called an initial public issue, which is available with brokers and banks. Then, stocks are sold on the stock exchanges. While some markets still have an open outcry system where people physically trade in shares, India has moved to a fully online system. Investors need to sign up with a registered broker and after much paperwork can buy and sell at the prevailing price of shares.

What causes price change?

Investors’ sentiments cause price fluctuation. Say, a firm announces an overseas acquisition and investors feel that the move would cause a drain rather than value addition, there will be more sellers of the stock than buyers. Thus, the stock’s price would go down. The reverse is also true. Overall market sentiments also affect prices. After the 9/11 attack, the Dow Jones Industrial Average lost 684 points when it reopened on 17 September 2001.

If firm dissolves?

If that happens, all debtors except stockholders, who are supposed to be risk-takers along with promoters, are paid first. Of the remaining assets, stockholders are paid in proportion to their holding.