The stock or capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security A security is a fungible, negotiable instrument representing financial value. Securities are broadly categorized into debt securities and equity securities, e.g., common stocks; and derivative contracts, such as forwards, futures, options and swaps. The company or other entity issuing the security is called the issuer. A country's regulatory for the creditors of a business since it cannot be withdrawn to the detriment of the creditors. Stock is distinct from the property and the assets of a business which may fluctuate in quantity and value.

Shares

The stock of a business is divided into shares In financial markets, a share is a unit of account for various financial instruments including stocks , and investments in limited partnerships, and REITs. The common feature of all these is equity participation (limited in the case of preference shares), the total of which must be stated at the time of business formation. Given the total amount of money invested in the business, a share has a certain declared face value, commonly known as the par value Par value, in finance and accounting, means stated value or face value. From this comes the expressions at par , over par (over par value) and under par (under par value) of a share. The par value is the de minimis De minimis is a Latin expression meaning about minimal things, normally in the locutions de minimis non curat praetor ("the praetor does not concern himself with trifles") or de minimis non curat lex ("the law does not concern itself with trifles") (minimum) amount of money that a business may issue and sell shares for in many jurisdictions and it is the value represented as capital in the accounting Accountancy is the art of communicating financial information about a business entity to users such as shareholders and managers. The communication is generally in the financial´s form statements that show in money terms the economic resources under the control of management; the art lies in selecting the information that is relevant to the user of the business. In other jurisdictions, however, shares may not have an associated par value at all. Such stock is often called non-par stock. Shares represent a fraction of ownership Ownership is the state or fact of exclusive rights and control over property, which may be an object, land/real estate or intellectual property. Ownership involves multiple rights, collectively referred to as title, which may be separated and held by different parties. The concept of ownership has existed for thousands of years and in all cultures in a business. A business may declare different types (classes) of shares, each having distinctive ownership rules, privileges, or share values.

Ownership of shares is documented by issuance of a stock certificate In corporate law, a stock certificate is a legal document that certifies ownership of a specific number of stock shares (or fractions thereof) in a corporation. In large corporations, buying shares does not always lead to a stock certificate (in a case of a small number of shares purchased by a private individual, for instance). A stock certificate is a legal document that specifies the amount of shares owned by the shareholder A mutual shareholder or stockholder is an individual or company that legally owns one or more shares of stock in a joint stock company. A company's shareholders collectively own that company and are the members of the company by signing the memorandum of association . Thus, the typical goal of such companies is to enhance shareholder value, and other specifics of the shares, such as the par value, if any, or the class of the shares.

Usage

Used in the plural, stocks is often used as a synonym for shares.^[1] Traditionalist demands that the plural stocks be used only when referring to stocks of more than one company are rarely heard nowadays.

In the United Kingdom The United Kingdom of Great Britain and Northern Ireland[note 7] is a sovereign state located off the northwestern coast of continental Europe. It is an island country, spanning an archipelago including Great Britain, the northeastern part of the island of Ireland, and many small islands. Northern Ireland is the only part of the UK with a land, South Africa Coordinates: 29°02′46″S 25°03′47″E / 29.046°S 25.063°E The Republic of South Africa is a country located at the southern tip of Africa, with a 2,798 kilometres coastline on the Atlantic and Indian Oceans. To the north lie Namibia, Botswana and Zimbabwe; to the east are Mozambique and Swaziland; while Lesotho is an independent, and Australia For at least 40,000 years before European settlement in the late 18th century, Australia was inhabited by indigenous Australians, who belonged to one or more of the roughly 250 language groups. After sporadic visits by fishermen from the immediate north and discovery by Dutch explorers in 1606, Australia's eastern half was claimed by the British, stock can also refer to completely different financial instruments Alternatively, financial instruments can be categorized by "asset class" depending on whether they are equity based or debt based (reflecting a loan the investor has made to the issuing entity). If it is debt, it can be further categorised into short term (less than one year) or long term such as government bonds In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest and/or to repay the principal at a later date, termed maturity. A bond is a formal contract to repay borrowed money with interest at fixed intervals or, less commonly, to all kinds of marketable A security is a fungible, negotiable instrument representing financial value. Securities are broadly categorized into debt securities and equity securities, e.g., common stocks; and derivative contracts, such as forwards, futures, options and swaps. The company or other entity issuing the security is called the issuer. A country's regulatory securities A security is a fungible, negotiable instrument representing financial value. Securities are broadly categorized into debt securities and equity securities, e.g., common stocks; and derivative contracts, such as forwards, futures, options and swaps. The company or other entity issuing the security is called the issuer. A country's regulatory.^[2]

Types of stock

Stock typically takes the form of shares of either common stock A voting share is a share of stock giving the stockholder the right to vote on matters of corporate policy and the composition of the members of the board of directors or preferred stock Preferred stock, also called preferred shares, preference shares, or simply preferreds, is a special equity security that has properties of both an equity and a debt instrument and is generally considered a hybrid instrument. Preferreds are senior to common stock, but are subordinate to bonds. As a unit of ownership, common stock typically carries voting rights that can be exercised in corporate decisions. Preferred stock Preferred stock, also called preferred shares, preference shares, or simply preferreds, is a special equity security that has properties of both an equity and a debt instrument and is generally considered a hybrid instrument. Preferreds are senior to common stock, but are subordinate to bonds differs from common stock in that it typically does not carry voting rights but is legally entitled to receive a certain level of dividend Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be paid to the shareholders as a dividend. Many corporations retain a payments before any dividends can be issued to other shareholders.^[3][4] Convertible preferred stock is preferred stock that includes an option In finance, an option is a type of financial instrument classed as derivatives because they derive their value from an underlying asset. An option gives its holder the right, but not the obligation, to buy or to sell some asset on or before the option's expiration at an agreed price, the strike price for the holder to convert the preferred shares into a fixed number of common shares, usually anytime after a predetermined date. Shares of such stock are called "convertible preferred shares" (or "convertible preference shares" in the UK)

New equity issues may have specific legal clauses attached that differentiate them from previous issues of the issuer. Some shares of common stock may be issued without the typical voting rights, for instance, or some shares may have special rights unique to them and issued only to certain parties. Often, new issues that have not been registered with a securities governing body may be restricted Restricted stock, also known as letter stock or restricted securities, refers to stock of a company that is not fully transferable until certain conditions have been met. Upon satisfaction of those conditions, the stock becomes transferable by the person holding the award from resale for certain periods of time.

Preferred stock may be hybrid by having the qualities of bonds of fixed returns and common stock voting rights. They also have preference in the payment of dividends over common stock and also have been given preference at the time of liquidation over common stock. They have other features of accumulation in dividend.

Stock derivatives

A stock derivative A derivative, in non-financial-expert terms, is an agreement or contract that is not based on a real, or true, exchange, i.e.: There is nothing tangible like money, or a product, that is being exchanged. For example, a person goes to the grocery store, exchanges a currency for a commodity (say, an apple). The exchange is complete, both parties is any financial instrument which has a value that is dependent on the price of the underlying In finance, the underlying of a derivative is an asset, basket of assets, index, or even another derivative, such that the cash flows of the derivative depend on the value of this underlying. There must be an independent way to observe this value to avoid conflicts of interest stock. Futures In finance, a futures contract is a standardized contract between two parties to buy or sell a specified asset of standardized quantity and quality at a specified future date at a price agreed today . The contracts are traded on a futures exchange. Futures contracts are not "direct" securities like stocks, bonds, rights or warrants. They and options In finance, an option is a type of financial instrument classed as derivatives because they derive their value from an underlying asset. An option gives its holder the right, but not the obligation, to buy or to sell some asset on or before the option's expiration at an agreed price, the strike price are the main types of derivatives on stocks. The underlying security may be a stock index A stock market index is a method of measuring a section of the stock market. Many indices are cited by news or financial services firms and are used to benchmark the performance of portfolios such as mutual funds or an individual firm's stock, e.g. single-stock futures Single-stock futures are futures contracts with the underlying asset being one particular stock, usually in batches of 100. When purchased, no transmission of share rights or dividends occurs. Being futures contracts they are traded on margin, thus offering leverage, and they are not subject to the short selling limitations that stocks are. They.

Stock futures are contracts where the buyer is long In finance, a long position in a security, such as a stock or a bond, or equivalently to be long in a security, means the holder of the position owns the security and will profit if the price of the security goes up. Going long is the more conventional practice of investing and is contrasted with going short, i.e., takes on the obligation to buy on the contract maturity date, and the seller is short In finance, short selling is the practice of selling assets, usually securities, that have been borrowed from a third party (usually a broker) with the intention of buying identical assets back at a later date to return to the lender. The short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase, as, i.e., takes on the obligation to sell. Stock index futures In finance equity derivatives is a class of derivatives which value is at least partly derived from one or more underlying equity securities. Options and futures are by far the most common equity derivatives, however there are many other types of equity derivatives that are actively traded are generally not delivered in the usual manner, but by cash settlement.

A stock option In finance, an option is a contract between a buyer and a seller that gives the buyer of the option the right, but not the obligation, to buy or to sell a specified asset on or before the option's expiration time, at an agreed price, the strike price is a class of option. Specifically, a call option The buyer of a call option wants the price of the underlying instrument to rise in the future; the seller either expects that it will not, or is willing to give up some of the upside from a price rise in return for the premium (paid immediately) and retaining the opportunity to make a gain up to the strike price (see below for examples) is the right (not obligation) to buy stock in the future at a fixed price and a put option A put option is a financial contract between two parties, the writer (seller) and the buyer of the option. The buyer acquires a short position with the right, but not the obligation, to sell the underlying instrument at an agreed-upon price (the strike price). If the buyer exercises his right to sell the option, the seller is obliged to buy it at is the right (not obligation) to sell stock in the future at a fixed price. Thus, the value of a stock option changes in reaction to the underlying stock of which it is a derivative A derivative, in non-financial-expert terms, is an agreement or contract that is not based on a real, or true, exchange, i.e.: There is nothing tangible like money, or a product, that is being exchanged. For example, a person goes to the grocery store, exchanges a currency for a commodity (say, an apple). The exchange is complete, both parties. The most popular method of valuing stock options is the Black Scholes The Black–Scholes model is a mathematical description of financial markets and derivative investment instruments. The model develops partial differential equations whose solution, the Black–Scholes formula, is widely used in the pricing of European-style options model.^[5] Apart from call options granted to employees An employee stock option is a call option on the common stock of a company, issued as a form of non-cash compensation. Restrictions on the option attempt to align the holder's interest with those of the business' shareholders. If the company's stock rises, holders of options generally experience a direct financial benefit. This gives employees an, most stock options are transferable.

History

During Roman Ancient Rome was a civilization that grew out of a small agricultural community founded on the Italian Peninsula as early as the 10th century BC. Located along the Mediterranean Sea, it became one of the largest empires in the ancient world times, the empire contracted out many of its services to private groups called publicani In antiquity, publicans (Latin publicanus ; publicani (plural)) were public contractors, in which role they often supplied the Roman legions and military, managed the collection of port duties, and oversaw public building projects. In addition, they served as tax collectors for the Republic (and later the Roman Empire), bidding on contracts (from. Shares in publicani were called "socii" (for large cooperatives) and "particulae" which were analogous to today's Over-The-Counter shares of small companies. Though the records available for this time are incomplete, Edward Chancellor states in his book Devil Take the Hindmost that there is some evidence that a speculation in these shares became increasingly widespread and that perhaps the first ever speculative bubble A stock market bubble is a type of economic bubble taking place in stock markets when market participants drive stock prices above their value in relation to some system of stock valuation in "stocks" occurred.^{[citation needed]}

The first company to issue shares of stock after the Middle Ages The Middle Ages is a period of European history from the 5th century to the 15th century. The period followed the fall of the Western Roman Empire in 476, and preceded the Early Modern Era. It is the middle period in a three-period division of history: Classical, Medieval, and Modern. The term "Middle Ages" (medium aevum) was coined in was the Dutch East India Company The Dutch East India Company was a chartered company established in 1602, when the States-General of the Netherlands granted it a 21-year monopoly to carry out colonial activities in Asia. It was the first multinational corporation in the world and the first company to issue stock. It was also arguably the world's first megacorporation, possessing in 1606. The innovation of joint ownership made a great deal of Europe Europe is, by convention, one of the world's seven continents. Comprising the westernmost peninsula of Eurasia, Europe is generally divided from Asia to its east by the water divide of the Ural Mountains, the Ural River, the Caspian Sea, the Caucasus region (Specification of borders) and the Black Sea to the southeast. Europe is bordered by the's economic growth Economic growth is a term used to indicate the increase of per capita gross domestic product or other measure of aggregate income. It is often measured as the rate of change in GDP. Economic growth refers only to the quantity of goods and services produced possible following the Middle Ages The Middle Ages is a period of European history from the 5th century to the 15th century. The period followed the fall of the Western Roman Empire in 476, and preceded the Early Modern Era. It is the middle period in a three-period division of history: Classical, Medieval, and Modern. The term "Middle Ages" (medium aevum) was coined in. The technique of pooling capital to finance the building of ships, for example, made the Netherlands The Netherlands (pronounced /ˈnɛðɚləndz/ ; Dutch: Nederland, pronounced [ˈneːdərlɑnt] ( listen)) is a constituent country of the Kingdom of the Netherlands, located in North-West Europe. It is a parliamentary democratic constitutional monarchy. The Netherlands borders the North Sea to the north and west, Belgium to the south, and Germany a maritime Shipping has multiple meanings. It can be a physical process of transporting goods and cargo, by land, air, and sea. It also can describe the movement of objects by ship superpower A superpower is a state with a leading position in the international system which has the ability to influence events and its own interests and project power on a worldwide scale to protect those interests. A superpower is traditionally considered to be one step higher than a great power. Before adoption of the joint-stock corporation, an expensive venture such as the building of a merchant ship could be undertaken only by governments or by very wealthy individuals or families.

Economic historians find the Dutch stock market of the 1600s particularly interesting: there is clear documentation of the use of stock futures, stock options In finance, an option is a contract between a buyer and a seller that gives the buyer of the option the right, but not the obligation, to buy or to sell a specified asset on or before the option's expiration time, at an agreed price, the strike price, short selling In finance, short selling is the practice of selling assets, usually securities, that have been borrowed from a third party (usually a broker) with the intention of buying identical assets back at a later date to return to the lender. The short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase, as, the use of credit to purchase shares, a speculative bubble that crashed in 1695, and a change in fashion that unfolded and reverted in time with the market (in this case it was headdresses instead of hemlines). Dr. Edward Stringham also noted that the uses of practices such as short selling continued to occur during this time despite the government passing laws against it. This is unusual because it shows individual parties fulfilling contracts that were not legally enforceable and where the parties involved could incur a loss. Stringham argues that this shows that contracts can be created and enforced without state sanction or, in this case, in spite of laws to the contrary.^[6][7]

Shareholder

A shareholder (or stockholder) is an individual or company (including a corporation) that legally owns one or more shares of stock in a joint stock company. Both private and public traded companies have shareholders. Companies listed at the stock market are expected to strive to enhance shareholder value.

Shareholders are granted special privileges depending on the class of stock, including the right to vote on matters such as elections to the board of directors, the right to share in distributions of the company's income, the right to purchase new shares issued by the company, and the right to a company's assets during a liquidation of the company. However, shareholder's rights to a company's assets are subordinate to the rights of the company's creditors.

Shareholders are considered by some to be a partial subset of stakeholders, which may include anyone who has a direct or indirect equity interest in the business entity or someone with even a non-pecuniary interest in a non-profit organization. Thus it might be common to call volunteer contributors to an association stakeholders, even though they are not shareholders.

Although directors and officers of a company are bound by fiduciary duties to act in the best interest of the shareholders, the shareholders themselves normally do not have such duties towards each other.

However, in a few unusual cases, some courts have been willing to imply such a duty between shareholders. For example, in California, USA, majority shareholders of closely held corporations have a duty to not destroy the value of the shares held by minority shareholders.^[8][9]

The largest shareholders (in terms of percentages of companies owned) are often mutual funds, and, especially, passively managed exchange-traded funds.

Application

The owners of a company may want additional capital to invest in new projects within the company. They may also simply wish to reduce their holding, freeing up capital for their own private use.

By selling shares they can sell part or all of the company to many part-owners. The purchase of one share entitles the owner of that share to literally share in the ownership of the company, a fraction of the decision-making power, and potentially a fraction of the profits, which the company may issue as dividends.

In the common case of a publicly traded corporation, where there may be thousands of shareholders, it is impractical to have all of them making the daily decisions required to run a company. Thus, the shareholders will use their shares as votes in the election of members of the board of directors of the company.

In a typical case, each share constitutes one vote. Corporations may, however, issue different classes of shares, which may have different voting rights. Owning the majority of the shares allows other shareholders to be out-voted - effective control rests with the majority shareholder (or shareholders acting in concert). In this way the original owners of the company often still have control of the company.

Shareholder rights

Although ownership of 50% of shares does result in 50% ownership of a company, it does not give the shareholder the right to use a company's building, equipment, materials, or other property. This is because the company is considered a legal person, thus it owns all its assets itself. This is important in areas such as insurance, which must be in the name of the company and not the main shareholder.

In most countries, boards of directors and company managers have a fiduciary responsibility to run the company in the interests of its stockholders. Nonetheless, as Martin Whitman writes:

...it can safely be stated that there does not exist any publicly traded company where management works exclusively in the best interests of OPMI [Outside Passive Minority Investor] stockholders. Instead, there are both "communities of interest" and "conflicts of interest" between stockholders (principal) and management (agent). This conflict is referred to as the principal/agent problem. It would be naive to think that any management would forgo management compensation, and management entrenchment, just because some of these management privileges might be perceived as giving rise to a conflict of interest with OPMIs.^[10]

Even though the board of directors runs the company, the shareholder has some impact on the company's policy, as the shareholders elect the board of directors. Each shareholder typically has a percentage of votes equal to the percentage of shares he or she owns. So as long as the shareholders agree that the management (agent) are performing poorly they can elect a new board of directors which can then hire a new management team. In practice, however, genuinely contested board elections are rare. Board candidates are usually nominated by insiders or by the board of the directors themselves, and a considerable amount of stock is held or voted by insiders.

Owning shares does not mean responsibility for liabilities. If a company goes broke and has to default on loans, the shareholders are not liable in any way. However, all money obtained by converting assets into cash will be used to repay loans and other debts first, so that shareholders cannot receive any money unless and until creditors have been paid (often the shareholders end up with nothing).^[11]

Means of financing

Financing a company through the sale of stock in a company is known as equity financing. Alternatively, debt financing (for example issuing bonds) can be done to avoid giving up shares of ownership of the company. Unofficial financing known as trade financing usually provides the major part of a company's working capital (day-to-day operational needs).

Trading

The shares of a company may in general be transferred from shareholders to other parties by sale or other mechanisms, unless prohibited. Most jurisdictions have established laws and regulations governing such transfers, particularly if the issuer is a publicly-traded entity.

The desire of stockholders to trade their shares has led to the establishment of stock exchanges. A stock exchange is an organization that provides a marketplace for trading shares and other derivatives and financial products. Today, investors are usually represented by stock brokers who buy and sell shares of a wide range of companies on the exchanges. A company may list its shares on an exchange by meeting and maintaining the listing requirements of a particular stock exchange. In the United States, through the inter-market quotation system, stocks listed on one exchange can also be traded on other participating exchanges, including the Electronic Communication Networks (ECNs), such as Archipelago or Instinet.

Many large non-U.S companies choose to list on a U.S. exchange as well as an exchange in their home country in order to broaden their investor base. These companies must maintain a block of shares at a bank in the US, typically a certain percentage of their capital. On this basis, the holding bank establishes American Depositary Shares and issues an American Depository Receipt (ADR) for each share a trader acquires. Likewise, many large U.S. companies list their shares at foreign exchanges to raise capital abroad.

Small companies that do not qualify and cannot meet the listing requirements of the major exchanges may be traded over the counter (OTC) by an off-exchange mechanism in which trading occurs directly between parties. The major OTC markets in the United States are the electronic quotation systems OTC Bulletin Board (OTCBB) and the Pink OTC Markets (Pink Sheets) where individual retail investors are also represented by a brokerage firm and the quotation service's requirements for a company to be listed are minimal. Shares of companies in bankruptcy proceeding are usually listed by these quotation services after the stock is delisted from an exchange.

Buying

There are various methods of buying and financing stocks. The most common means is through a stock broker. Whether they are a full service or discount broker, they arrange the transfer of stock from a seller to a buyer. Most trades are actually done through brokers listed with a stock exchange.

There are many different stock brokers from which to choose, such as full service brokers or discount brokers. The full service brokers usually charge more per trade, but give investment advice or more personal service; the discount brokers offer little or no investment advice but charge less for trades. Another type of broker would be a bank or credit union that may have a deal set up with either a full service or discount broker.

There are other ways of buying stock besides through a broker. One way is directly from the company itself. If at least one share is owned, most companies will allow the purchase of shares directly from the company through their investor relations departments. However, the initial share of stock in the company will have to be obtained through a regular stock broker. Another way to buy stock in companies is through Direct Public Offerings which are usually sold by the company itself. A direct public offering is an initial public offering in which the stock is purchased directly from the company, usually without the aid of brokers.

When it comes to financing a purchase of stocks there are two ways: purchasing stock with money that is currently in the buyer's ownership, or by buying stock on margin. Buying stock on margin means buying stock with money borrowed against the stocks in the same account. These stocks, or collateral, guarantee that the buyer can repay the loan; otherwise, the stockbroker has the right to sell the stock (collateral) to repay the borrowed money. He can sell if the share price drops below the margin requirement, at least 50% of the value of the stocks in the account. Buying on margin works the same way as borrowing money to buy a car or a house, using a car or house as collateral. Moreover, borrowing is not free; the broker usually charges 8-10% interest.

Selling

Selling stock is procedurally similar to buying stock. Generally, the investor wants to buy low and sell high, if not in that order (short selling); although a number of reasons may induce an investor to sell at a loss, e.g., to avoid further loss.

As with buying a stock, there is a transaction fee for the broker's efforts in arranging the transfer of stock from a seller to a buyer. This fee can be high or low depending on which type of brokerage, full service or discount, handles the transaction.

After the transaction has been made, the seller is then entitled to all of the money. An important part of selling is keeping track of the earnings. Importantly, on selling the stock, in jurisdictions that have them, capital gains taxes will have to be paid on the additional proceeds, if any, that are in excess of the cost basis.

Stock price fluctuations

The price of a stock fluctuates fundamentally due to the theory of supply and demand. Like all commodities in the market, the price of a stock is sensitive to demand. However, there are many factors that influence the demand for a particular stock. The field of fundamental analysis and technical analysis attempt to understand market conditions that lead to price changes, or even predict future price levels. A recent study^[12] shows that customer satisfaction, as measured by the American Customer Satisfaction Index (ACSI), is significantly correlated to the market value of a stock. Stock price may be influenced by analyst's business forecast for the company and outlooks for the company's general market segment.

Share price determination

At any given moment, an equity's price is strictly a result of supply and demand. The supply is the number of shares offered for sale at any one moment. The demand is the number of shares investors wish to buy at exactly that same time. The price of the stock moves in order to achieve and maintain equilibrium.

When prospective buyers outnumber sellers, the price rises. Eventually, sellers attracted to the high selling price enter the market and/or buyers leave, achieving equilibrium between buyers and sellers. When sellers outnumber buyers, the price falls. Eventually buyers enter and/or sellers leave, again achieving equilibrium.

Thus, the value of a share of a company at any given moment is determined by all investors voting with their money. If more investors want a stock and are willing to pay more, the price will go up. If more investors are selling a stock and there aren't enough buyers, the price will go down.

• Note: "For Nasdaq-listed stocks, the price quote includes information on the bid and ask prices for the stock." ^[13]

Of course, that does not explain how people decide the maximum price at which they are willing to buy or the minimum at which they are willing to sell. In professional investment circles the efficient market hypothesis (EMH) continues to be popular, although this theory is widely discredited in academic and professional circles. Briefly, EMH says that investing is overall (weighted by a Stdev) rational; that the price of a stock at any given moment represents a rational evaluation of the known information that might bear on the future value of the company; and that share prices of equities are priced efficiently, which is to say that they represent accurately the expected value of the stock, as best it can be known at a given moment. In other words, prices are the result of discounting expected future cash flows.

The EMH model, if true, has at least two interesting consequences. First, because financial risk is presumed to require at least a small premium on expected value, the return on equity can be expected to be slightly greater than that available from non-equity investments: if not, the same rational calculations would lead equity investors to shift to these safer non-equity investments that could be expected to give the same or better return at lower risk. Second, because the price of a share at every given moment is an "efficient" reflection of expected value, then—relative to the curve of expected return—prices will tend to follow a random walk, determined by the emergence of information (randomly) over time. Professional equity investors therefore immerse themselves in the flow of fundamental information, seeking to gain an advantage over their competitors (mainly other professional investors) by more intelligently interpreting the emerging flow of information (news).

The EMH model does not seem to give a complete description of the process of equity price determination. For example, stock markets are more volatile than EMH would imply. In recent years it has come to be accepted that the share markets are not perfectly efficient, perhaps especially in emerging markets or other markets that are not dominated by well-informed professional investors.

Another theory of share price determination comes from the field of Behavioral Finance. According to Behavioral Finance, humans often make irrational decisions—particularly, related to the buying and selling of securities—based upon fears and misperceptions of outcomes. The irrational trading of securities can often create securities prices which vary from rational, fundamental price valuations. For instance, during the technology bubble of the late 1990s (which was followed by the dot-com bust of 2000-2002), technology companies were often bid beyond any rational fundamental value because of what is commonly known as the "greater fool theory". The "greater fool theory" holds that, because the predominant method of realizing returns in equity is from the sale to another investor, one should select securities that they believe that someone else will value at a higher level at some point in the future, without regard to the basis for that other party's willingness to pay a higher price. Thus, even a rational investor may bank on others' irrationality.

Arbitrage trading

When companies raise capital by offering stock on more than one exchange, the potential exists for discrepancies in the valuation of shares on different exchanges. A keen investor with access to information about such discrepancies may invest in expectation of their eventual convergence, known as arbitrage trading. Electronic trading has resulted in extensive price transparency (efficient market hypothesis) and these discrepancies, if they exist, are short-lived and quickly equilibrated.

See also

References

1. ^ www.askoxford.com. "Compact Oxford English Dictionary". Askoxford.com. http://www.askoxford.com/concise_oed/stock?view=uk. Retrieved 2010-02-12.
2. ^ "Cambridge Advanced Learner's Dictionary". Dictionary.cambridge.org. http://dictionary.cambridge.org/define.asp?key=78290&dict=CALD. Retrieved 2010-02-12.
3. ^ "Stock Basics", Investor Guide.com.
4. ^ Zvi Bodie, Alex Kane, Alan J. Marcus, Investments, 7th Ed., p. 26–53.
5. ^ "Black Scholes Calculator". Tradingtoday.com. http://www.tradingtoday.com/black-scholes. Retrieved 2010-02-12.
6. ^ http://www.sjsu.edu/depts/economics/faculty/stringham/docs/stringham-amsterdam.pdf
7. ^ "Devil the Hindmost" by Edward Chancellor.
8. ^ Jones v. H. F. Ahmanson & Co., 1 Cal. 3d)
9. ^ "Jones v. H.F. Ahmanson & Co. (1969) 1 C3d 93". Online.ceb.com. http://online.ceb.com/calcases/C3/1C3d93.htm. Retrieved 2010-02-12.
10. ^ Whitman, 2004, 5
11. ^ Jackson, Thomas (2001). The Logic and Limits of Bankruptcy Law. Oxford Oxfordshire: Oxford University Press. p. 32. ISBN 1587981149.
12. ^ "Increased Customer Satisfaction Increases Stock Price". http://www.rhsmith.umd.edu/research/ras/spring2006/2.html.
13. ^ "Understanding Stock Prices: Bid, Ask, Spread". Youngmoney.com. http://www.youngmoney.com/investing/sharebuilder/goals/031021_08. Retrieved 2010-02-12.

External links

• Stock exchanges at the Open Directory Project
• Stocks investing at the Open Directory Project
• Stock Market Terminology
• Stock Market Trivia: History of Stocks
• Stock Basics Tutorial
• The oldest share in the world, issued by the Dutch East India Company (Vereenigde Oost-Indische Compagnie or VOC), 1606.

Categories: Stock market | Equity securities | Corporate finance | Economics terminology

See Also:

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