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Stock

A security issued by a corporation that represents an ownership right in the assets of the corporation and a right to a proportionate share of profits after payment of corporate liabilities and obligations.

Shares of stock are reflected in written instruments known as stock certificates. Each share represents a standard unit of ownership in a corporation. Stock differs from consumer goods in that it is not used or consumed; it does not have any intrinsic value but merely represents a right in something else. Nevertheless, a stockholder is a real owner of a corporation's property, which is held in the name of the corporation for the benefit of all its stockholders. An owner of stock generally has the right to participate in the management of the corporation, usually through regularly scheduled stockholders' (or shareholders') meetings. Stocks differ from other Securities such as notes and bonds, which are corporate obligations that do not represent an ownership interest in the corporation.

The value of a share of stock depends upon the issuing corporation's value, profitability, and future prospects. The market price reflects what purchasers are willing to pay based on their evaluation of the company's prospects.

Two main categories of stock exist: common and preferred. An owner of common stock is typically entitled to participate and vote at stockholders' meetings. In addition to common stock, some corporate bylaws or charters allow for the issuance of preferred stock. If a corporation does not issue preferred stock, all of its stock is common stock, entitling all holders to an equal pro rata division of profits or net earnings, should the corporation choose to distribute the earnings as dividends. Preferred stockholders are usually entitled to priority over holders of common stock should a corporation liquidate.

Preferred stocks receive priority over common stock with respect to the payment of dividends. Holders of preferred stock are entitled to receive dividends at a fixed annual rate before any dividend is paid to the holders of common stock. If the earnings to pay a dividend are more than sufficient to meet the fixed annual dividend for preferred stock, then the remainder of the earnings will be distributed to holders of common stock. If the corporate earnings are insufficient, common stockholders will not receive a dividend. In the alternative, a remainder may be distributed pro rata to both preferred and common classes of the stock. In such a case, the preferred stock is said to "participate" with the common stock.

A preferred stock dividend may be cumulative or noncumulative. In the case of cumulative preferred stock, an unpaid dividend becomes a charge upon the profits of the next and succeeding years. These accumulated and unpaid dividends must be paid to preferred stockholders before common stockholders receive any dividends. Noncumulative preferred stock means that a corporation's failure to earn or pay a dividend in any given year extinguishes the obligation, and no debit is made against the succeeding years' surpluses.

Par value is the face or stated value of a share of stock. In the case of common stocks, par value usually does not correspond to the market value of a stock, and a stated par value is of little significance. Par is important with respect to preferred stock, however, because it often signifies the dollar value upon which dividends are figured. Stocks without an assigned stated value are called no par. Some states have eliminated the concept of par value.

Blue chip stocks are stocks traded on a securities exchange (listed stock) that have minimum risk due to the corporation's financial record. Listed stock means a company has filed an application and registration statement with both the Securities and Exchange Commission and a securities exchange. The registration statement contains detailed information about the company to aid the public in evaluating the stock's potential. Floating stock is stock on the open market not yet purchased by the public. Growth stock is stock purchased for its perceived potential to appreciate in value, rather than for its dividend income. Penny stocks are highly speculative stocks that usually cost under a dollar per share.

Cross-references

Securities; Stock Market.

West's Encyclopedia of American Law, edition 2. Copyright 2008 The Gale Group, Inc. All rights reserved.

stock

1) n. inventory (goods) of a business meant for sale (as distinguished from equipment and facilities). 2) share in the ownership of a corporation (called "shares of stock" or simply "shares"). 3) cattle. 4) v. to keep goods ready for sale in a business. (See: share, shareholder)

Copyright © 1981-2005 by Gerald N. Hill and Kathleen T. Hill. All Right reserved.

stock

1 borrowing (usually other than short-term) by government or local authorities. In the case of corporate borrowing, the term loan stock is commonly used.
2 shares in a company that have been converted into a single holding with a nominal value equal to that of the total of the shares; accordingly, after conversion a shareholder formerly holding a thousand shares of £1 each will have a holding of £1,000 stock.
Collins Dictionary of Law © W.J. Stewart, 2006

STOCK, mer. law. The capital of a merchant tradesman, or other person including his merchandise, money and credits. In a narrower sense it signifies only the goods and wares he has for sale and traffic. The capital of corporations is also called stock; this is usually divided into shares of a definite value, as one hundred dollars, fifty dollars per share.
     2. The stock held by individuals in corporations is generally considered as personal property. 4 Dane's Ab. 670; Sull. on Land. Titl. 71; Walk. Introd. 211; 1 Hill, Ab. 1 8.

STOCK, descents. This is a metaphorical expression which designates, in the genealogy of a family, the person from whom others are descended: those persons who have so descended are called branches. Vide 1 Roper on Leg. 103; 2 Suppl. to Ves. 307 and Branch; Descent Line; Stirpes.

A Law Dictionary, Adapted to the Constitution and Laws of the United States. By John Bouvier. Published 1856.
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