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The Basics of the Stock Market


The type of equity securities with which most people are familiar is stock. Stocks may be designated as common stock, the most widely known form, or as preferred stock. When investors buy stock, they become owners of a "share" of a company's assets. Many U.S. businesses are privately owned, but investors can buy shares in more than 10,000 corporations that are publicly traded. This includes most of the titans of industry, such as Microsoft and Coca Cola, as well as many small companies. Today, many millions of people in the United Stock own stock in publicly traded companies or in equity mutual funds that invest in stocks. 

Generally, stocks are traded in blocks or multiples of 100 shares, which are called round lots. An amount of stock consisting of fewer than 100 shares is said to be an odd lot. On an exchange, an order that involves both a round lot and an odd lot, say 175 shares will be treated as two different trades and may be executed at different prices. Your broker will charge you a different commission on each trade, and will confirm each of them separately. These distinctions are not generally involved in trades executed in the OTC market. Some stocks are "restricted" or "unregistered," so designated because they were originally issued in a private sale or other transaction where they were not registered with the Securities Exchange Commission (SEC). Restricted or unregistered securities may not be freely resold unless a registration statement is filed with the SEC or unless an exemption under the law permits resale. 
 
If a company is successful, the price that investors are willing to pay for its stock will often go up -- shareholders who bought stock at a lower price then stand to make a profit. If a company does not do well, however, its stock may decrease in value and shareholders can lose money. As owners, shareholders generally have the right to vote on electing the board of directors and on certain other matters of particular significance to the company. Under the federal securities laws, most companies must send to shareholders a proxy statement providing information on the business experience and compensation of nominees to the board of directors and on any other matter submitted for shareholder vote. This information is required so that shareholders can make an informed decision on whether to elect the nominees or on how to vote on matters submitted for their consideration. 


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This page is created by Julia Lee '99 and is maintained by Professor Satyananda Gabriel of the Economics Department, Mount Holyoke College, January 1999.