What is a stock?

A stock is a certificate of ownership of a corporation.

As companies grew, it became more and more costly to buy everything that was needed and their financing needs grew.   Fairly quickly it became too expensive for a single person to afford all of the cash that a firm needed.  Someone got the idea to sell shares in the firm.  These shares were a percentage ownership.  Those that bought the shares were called investors.  Investors do not like to put money into a firm without being able to get it back out if they need it.  Thus, the shares were made transferable.  That means the shares can be sold to other investors. 

The sale of the shares from the firm to the initial investor is takes place in the primary market.  The sale generates cash for the firm.  Subsequent sales take place in the secondary market and are from investor to investor.  These sales do not generate any cash for the firm. 

Those that own stock are the owners of the firm.  They can elect a Board of Directors to look out for shareholder interests and to monitor management.  This is a form of internal monitoring.

Stockholders (or Shareholders as they are also known as) are the residual claimants of the corporation.  This means they get paid last.  In this position the stockholders are in the best position to monitor since they will make sure everyone else's implicit contract is taken care of since only then will shareholders get paid.

The better a firm is doing, the more someone will pay for the company's stock.  The shares trade in what are not surprisingly called stock markets.

GO to FinanceProfessor's  Introduction to Stock Markets