Company Stock

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on July 12, 2023

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What Is Company Stock?

Company stock represents ownership in a corporation and is issued in the form of shares. Shareholders who own company stock have a claim on the company's assets and earnings, and may have voting rights that allow them to participate in corporate decision-making.

There are two main types of company stock: common stock and preferred stock.

Common Stock

Common stock grants shareholders voting rights and potential dividends. The value of common stock may increase or decrease based on the company's performance and market conditions.

Preferred Stock

Preferred stock typically does not grant voting rights but offers priority in dividend payments and asset distribution in the event of liquidation. Preferred stock often pays a fixed dividend and may have additional features, such as convertibility to common stock or callability.

Companies issue stock through an initial public offering (IPO) or secondary offerings. The stock issuance process involves underwriters, regulatory filings, and eventually listing the shares on a stock exchange.

Reasons for Companies to Issue Stock

Raising Capital

Companies issue stock to raise capital for expansion, research and development, or other business needs. Stock issuance allows companies to access funding without incurring debt.

Employee Compensation and Incentives

Stock can be used as a form of compensation or incentive for employees through stock options, employee stock purchase plans (ESPPs), or restricted stock units (RSUs).

Enhancing Corporate Reputation

A public listing of a company's stock can enhance its reputation and credibility in the market, potentially attracting more customers and business partners.

Mergers and Acquisitions

Stock issuance can facilitate mergers and acquisitions by using company stock as a currency to acquire other companies.

Reasons for Companies to Issue Stock

Investing in Company Stocks

Factors to Consider

Company Financials

Investors should analyze a company's financial statements, including its income statement, balance sheet, and cash flow statement, to assess its financial health and growth prospects.

Industry and Market Conditions

Investors should consider the overall market conditions and the industry in which the company operates to evaluate potential risks and opportunities.

Management Quality

A company's management team plays a crucial role in its success. Investors should assess management's track record, experience, and vision for the company's future.

Dividends and Earnings

Company stock investments can generate returns through capital appreciation and dividend income. Investors should evaluate the company's dividend payment history and earnings growth potential.

Investment Strategies

Growth Investing

Growth investing focuses on companies with strong growth potential. These companies often reinvest earnings into the business for expansion, resulting in higher stock price appreciation.

Value Investing

Value investing involves identifying undervalued companies with strong fundamentals. Value investors seek stocks trading below their intrinsic value, aiming to profit from potential price corrections.

Dividend Investing

Dividend investing targets companies with consistent and growing dividend payments. Dividend investors seek income generation and capital preservation through stable, well-established companies.

Risks Associated With Company Stocks

Market Risk

Market risk refers to the possibility that the entire stock market declines, affecting the value of individual company stocks.

Industry Risk

Industry risk pertains to factors affecting a specific industry, such as regulatory changes, technological advancements, or increased competition.

Company-Specific Risk

Company-specific risk involves factors unique to a particular company, such as management decisions, financial performance, or legal issues.

Liquidity Risk

Liquidity risk occurs when an investor cannot buy or sell a company's stock easily due to low trading volume or limited market participants.

Investing in Company Stocks

Company Stock Valuation

Fundamental Analysis

Financial Statement Analysis

Financial statement analysis involves examining a company's financial statements to assess its financial health and growth prospects. This analysis helps investors make informed decisions about the company's stock.

Ratio Analysis

Ratio analysis involves calculating financial ratios using data from a company's financial statements to evaluate its performance, liquidity, solvency, and profitability.

Discounted Cash Flow (DCF) Analysis

DCF analysis estimates the intrinsic value of a company's stock by projecting its future cash flows and discounting them to their present value. This method helps investors determine if a stock is overvalued or undervalued.

Technical Analysis

Chart Patterns

Chart patterns are visual representations of historical price movements that can help investors identify trends and potential trading opportunities in company stocks.

Technical Indicators

Technical indicators are mathematical calculations based on a stock's price, volume, or other market data. These indicators can help investors assess market trends and make informed trading decisions.

Trend Analysis

Trend analysis involves studying historical price movements to identify prevailing market trends, such as uptrends, downtrends, or sideways movement, to inform investment decisions.

Stock Exchanges and Trading

Major Stock Exchanges

New York Stock Exchange (NYSE)

The NYSE is the largest stock exchange globally by market capitalization, and it lists many well-known companies across various industries.

NASDAQ

The NASDAQ is known for its technology-focused listings, featuring major technology companies such as Apple, Amazon, and Google parent company Alphabet.

London Stock Exchange (LSE)

The LSE is one of the oldest stock exchanges globally and lists companies from various countries and industries.

Trading Company Stocks

Online Brokerage Accounts

Investors can trade company stocks through online brokerage accounts, which provide access to stock exchanges and trading platforms.

Trading Platforms

Trading platforms offer various tools and features, such as real-time quotes, charting, and research, to facilitate stock trading.

Order Types

Investors can place various order types, such as market orders, limit orders, and stop orders, to manage their trades and minimize risks.

Company Stock in Employee Benefits

Employee Stock Options (ESOs)

ESOs grant employees the right to purchase a specified number of company shares at a predetermined price, allowing them to benefit from the stock's appreciation.

Employee Stock Purchase Plans (ESPPs)

ESPPs enable employees to purchase company stock at a discounted price through payroll deductions, encouraging employee ownership and long-term investment.

Restricted Stock Units (RSUs)

RSUs represent a promise by the company to grant employees a specified number of shares after a vesting period. RSUs offer employees potential capital appreciation and dividend income.

Tax Considerations for Company Stock

Capital Gains and Losses

Capital gains tax applies to the profit made when selling company stock at a higher price than its purchase price. Capital losses can offset capital gains and reduce tax liability.

Dividend Taxes

Dividend income from company stocks may be subject to taxation, depending on the investor's tax bracket and residency.

Employee Stock Options and Grants

Employee stock options and grants may have tax implications, including income tax, capital gains tax, and payroll taxes. Employees should consult a tax professional to understand their specific tax liabilities.

Conclusion

Company stock represents ownership in a corporation and can offer investors potential capital appreciation and dividend income. Companies issue stock for various reasons, such as raising capital, compensating employees, or enhancing their reputation.

Investors should consider factors such as company financials, market conditions, and management quality when investing in company stocks.

Company stocks play a vital role in the financial market by providing companies with a means to raise capital and offering investors a diverse range of investment opportunities.

The future of company stock investing will be influenced by factors such as technological advancements, regulatory changes, and global economic conditions.

As the financial market continues to evolve, company stocks will remain an essential component of investment portfolios, offering investors opportunities for growth, income, and diversification.

Investors must stay informed about market trends and company developments to make well-informed decisions and navigate the ever-changing landscape of company stock investing.

Company Stock FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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