from Dr. Greg Valentine, Director
Center for Economic Education at USI
A service for players of the Stock Market Game
STOCKS: Sharing a
Corporation
Published by the
Evansville Courier Company
Tuesday, December 1, 1998
Stocks are pieces of the corporate pie. When you buy stocks, or shares, you own a slice of the company. A corporation's stockholders (shareholders) own a fractional portion of the corporation. Individuals buy stock of specific corporations because they expect to profit when the corporation profits. Corporations issue two basic types of stocks: Common and Preferred.
Common stocks are ownership shares in a corporation. They are sold initially by the corporation and then traded among investors. Investors who purchase common stock expect to earn dividends as their part of the profits and hope that the price of the stock will go up so their investment will be worth more. Common stock offers no performance guarantees, but over time have produced a better rate of return than other types of investments. However, if the corporation fails, the common stockholder is not guaranteed that they will receive any of the investment.
Preferred stocks are also ownership shares issued by a corporation and traded by investors. They differ from common stock in several ways. The amount of the dividend is not increased if the company profits. The price of preferred stock increases more slowly than that of common stock. The initial price of preferred stock is grated than common stock. Finally, preferred stockholders have a greater chance of getting investment returns if the corporation fails.
The risk investors take when they buy stocks are that the individual corporations will not do well, or that stock prices in general will weaken. At worst, it is possible to lose an entire investment, though not more than that. Stockholders are not responsible for the debts of a corporation.
The above article was taken from the Evansville Courier Company. Watch each week for more background information about the stock market.