Company Stock
When the topic of investing comes up, many people think first about company stock. However, most investors, especially when starting out, do not buy and sell company stock unless they inherited the stock or have a personal connection to the company.
Instead, the most popular way for most people to invest is through mutual funds and ETFs in a workplace retirement plan or individual retirement account. That said, it’s good to have an understanding of what stock is and how it works on the stock market.
What is stock?
Stock, issued in units called shares, represents ownership of a piece of the issuing corporation. Corporations issue stock to raise money for their business operations during their initial public offering (IPO).
Stock can then be bought and sold on a market such as the New York Stock Exchange or Nasdaq (National Association of Securities Dealers Automated Quotations, the first electronic stock exchange).
Stock can generate a return (in other words, make money) for its owners in two ways:
If the price of the stock goes up after you buy it, then you sell it for more than you paid.
Through dividends, or payments to shareholders. Not all stocks pay dividends.
Types of stock
Most individual investors own common stock, which entitles them to receive any dividends and vote on shareholder resolutions at the corporation’s annual general meeting.
Many institutional investors own preferred stock, which does not bestow voting rights, but is less volatile and provides a higher claim for dividends and any payouts if the company goes bankrupt. Institutional investors are organizations such as congregations, universities, or pension funds.
Stock can also be classified by market capitalization, which represents the total value of all company shares across the market. Large-cap corporations have more shares on the market, and their shares tend to sell at higher prices than shares for small-cap or mid-cap companies. These classifications break down as follows:
Small-cap corporation: $250 million to $2 billion
Mid-cap corporation: $2 billion to $10 billion
Large-cap corporation: $10 billion or more
Large-cap corporations are mature companies -- household names like Apple, Amazon, or Walmart. Their stocks are less volatile but also more expensive and subject to less growth. Small-cap and mid-cap stocks are more affordable and have more room for growth, but can also be more volatile.
Fractional shares
Fractional shares are parts of a single share in company stock – for example, half a share in Netflix. They typically occur as a result of stock splits, dividend reinvestments, or company mergers and acquisitions.
Fractional shares can help ordinary investors build a more diverse portfolio at a more affordable price. Some blue-chip stocks can cost hundreds, even thousands, of dollars per share. For example, as of this writing:
A share in Coca-Cola costs $1,408.59
A share in Costco costs $1081.75
A share in Microsoft costs $408.43
Fractional shares allow you to buy the amount of stock you can afford, whether it’s $5 or $500 worth of stock in a high-priced company. This lets you easily diversify your stock portfolio.
The main disadvantage of fractional shares is you can’t buy or sell them directly yourself – you need to go to a brokerage. This means they are difficult to transfer if you switch to a new broker. They also may not be available for all company stocks and do not typically include shareholder voting rights.
Learn more about company stock and how to evaluate it on the Green America website.
