What are Stocks?

In everyday language, when we talk of stocks we normally refer to equity stocks or ordinary stocks of a company. The terms shares and stocks essentially mean the same thing, the latter being a more common American usage.

An equity stock is evidence of ownership in a company. The physical evidence of this ownership is a document called the stock certificate. Nowadays, stocks are usually kept in electronic, or dematerialized, form with a depository participant (banks, brokers, financial institutions) of the National Securities Depository Limited (NSDL). However, if one wants one can still hold stocks in the physical form which has your name endorsed on it, and is proof that you are a part owner of the company. Your ownership rights are proportionate to the number of stocks you own. Suppose you purchase 100 stocks in a company called XYZ Ltd, which has issued 10,000 stocks, then you would own 1 per cent of the company. In short, it would mean that you own 1 per cent of its land, factory, equipment, patents, bank balances and all its other assets. Therefore when you invest in stocks, you are actually purchasing a fractional ownership of the company.

Companies issue stocks of a certain fixed denomination, called face value or par value of that stock, which is clearly indicated on a stock certificate in the physical form. Face value or par value is the nominal value of the stock in the books of the company. It is important to understand that it bears no relationship to the stock's market price which fluctuates all the time. Dividends, however, are issued on the par value of the stock and not its market value. It continues to retain this value, so far as the company is concerned, a stock continues to be accounted for in its books at its face value irrespective of the price at which it may later be bought or sold in the stock markets.