Kim Benson, age 13, of Prescott, Ariz., for her question:
HOW DOES STOCK WORK?
Stock certificates in business and finance represent shares of ownership in a corporation. When individuals or organizations purchase shares in a company, they receive stock certificates indicating the number of shares they have acquired. Such certificates entitle them to shares in the profits of the company.
Besides a claim on company profits, which are paid out at intervals in the form of dividends, stockholders are entitled to share in the sale of the company if it is dissolved. They may also vote in person or by proxy for corporation officers, inspect the accounts of the company at reasonable times; vote at stockholders' meetings and, when the company issues new stock, have priority to buy a certain number of shares before they are offered for public sale.
Because stocks are generally negotiable, meaning they can be easily sold and transferred, stockholders can assign their shares to another individual.
Unlike a sole proprietor or partner in a business, a stockholder is not liable for the debts of the corporation in which he or she has invested. The most the stockholder can lose if the company fails is the amount of his or her investment.
The two main stock categories are called common and preferred.
Common stockholders have residual equity in a corporation, meaning they have the last claim on the earnings and assets of a company, and may receive dividends only at the discretion of the company's board of directors and after all other claims on profits have been satisfied.
If the stock has preferred dividends, the owner is entitled to receive a fixed dividend rate before any dividends are distributed to other stockholders. If the stock has preferred assets, the stockholder receives a share of the proceeds from the dissolution of a company before holders of non prefered stock.
Two other stock categories are redeemable stock and convertible stock.
Redeemable stock is preferred stock issued with the stipulation that the corporation has the right to repurchase it.
Convertible stock endows the stockholder with the option of exchanging preferred stock for common stock under specific conditions, such as when the common stock reaches a certain price, or when the preferred stock has been held for a particular time.
Stocks provide the means for a corporation to raise money. An alternative method is the issuing of bonds. Bonds are evidence of loans. Stocks are evidence of ownership.
As a financial claim against a company, bonds take precedence over all types of stock. Thus, they are a safer investment than stocks, especially in times of deflation.
Stocks, however, are usually the better investment during inflation because they represent ownership of assets that will probably rise in value as fast as or faster than general prices. Because the dollar value of bonds is fixed, they cannot serve as a hedge against inflation as do common stocks.