The stock of a corporation consists of the equity stock of its owners, and each share of the stock represents a fractional ownership of the corporation. This means that when you buy one share in a corporation and become a shareholder, you become co-owner of that corporation. Depending of the type of stock, you are given certain rights as a shareholder, e.g. the right to vote at shareholder meetings and the right to receive dividends if dividends are handed out.

Share types

The two most common types of shares are shares of common stock and shares of preferred stock. In some jurisdictions, these are the only permitted share types.

Shares of preferred stock receive preferential treatment when (if) dividends are paid out from the corporation to its owners. As a trade off, shares of preferred stock tend to come without voting rights. Shares of preferred stock are therefore popular among investors who are interested in receiving dividends but doesn’t want to involve themselves in how the company is run.

Stock exchanges

Investors and speculators wishing to buy and sell shares in corporations in a well organized fashion led to the creation of stock exchanges. When a corporation is listed on a stock exchange, it becomes a public company and must adhere to a very specific set of rules. Only a fraction of all corporations worldwide are listed at an exchange.

Here are a few examples of well-known exchange-traded corporations, i.e. corporations listed at an exchange:

Name of the corporation Ticker symbol Name of the exchange
GlaxoSmithKline GSK London Stock Exchange (LSE)
Unilever ULVR London Stock Exchange (LSE)
Toyota Motor Corp. 7203 Tokyo Stock Exchange (TSE/TYO)
Yamaha Motor Corp. 7272 Tokyo Stock Exchange (TSE/TYO)

OTC trading

When shares are bought and sold outside a stock exchange, it is known as over-the-counter (OTC) trading. For a corporation that isn’t listed on any exchange, OTC trading is the only way to buy and sell shares. When a corporation is listed on an exchange, OTC trading can still occur, e.g. because traders wish to buy and sell shares even when the exchange is closed.

Retail stock brokers online

In the past, trading in exchange-listed stocks was a privilege that few people could engage in. Among other things, you needed a pretty large bankroll and the willingness to put up with fairly large transaction costs. Today, this situation has changed significantly, and even small-scale hobby traders are buying and selling shares in exchange-listed corporations.

If you want to buy and sell shares, you can sign up with one of the many stock broker sites available online and make a deposit. You don’t need a huge bankroll to get started and you don’t have to buy big blocks of shares.

Stock derivatives

In finance, a derivative is a contract that derives its value form the performance of an underlying entity. One of the most famous derivatives is the stock option, where one or more shares serve as the underlying asset for the option.

A call stock option gives its owner the right, but not the obligation, to buy a certain number of shares in a specified corporation for a pre-determined price. A put stock option gives its owner the right, but not the obligation, to sell a certain number of shares in a specified corporation for a pre-determined price.

Example: You own a call stock option that gives you the right to buy 100 shares of common stock in Apple Inc for 150 USD per share on January 15, 2018.

When January 15 rolls around, the value of your stock option will depend on the market value of shares of common stock in Apple Inc. Let’s for instance assume that the strike price (market value) for the shares is 175 USD on January 15. You can then elect to buy 100 shares for 15,000 USD and then immediately turn around and sell them for 17,500 USD, pocketing the difference (minus transaction costs). If on the other hand you see that the strike price is just 140 USD, you don’t have to do anything since you are under no obligation to buy the shares.

Many retail brokers online that offers stock trading also make it possible for their clients to trade in stock derivatives.