Friday, May 15, 2009

corporate stock

A share of corporate stock is an equity instrument that represents ownership of a share of the assets and earnings of a corporation.When a corporation like AT&T needs long-term funds,it can sell shares of stock to individuals or other investors. AT&T uses the funds received to purchase assets and run the company;in return,the shareholder owns a share of these assets and the earnings they generate for AT&T.The profits earned by a corporation and paid to shareholders are known as dividends. Unlike interest payments,dividends can vary with the health of the company.
It is important to emphasize that the only time a corporation receives money from stock is the time at which it issues the stock--the primary market transaction. When the company decides to issue stock,it offers the shares to underwriters,investment banks that guarantee the firm a certain price for the issue. Then the investment banker (or bankers,if the issue is large)sells the stock to individual investors,with the assistance of brokers,at what they hope is a higher price than the guaranteed price. Effectively the underwriters provide insurance to the company issuing the new stock and bear the risk associated with the low price investors pay for the stock.
Once a new issue is in the hands of individual investors, the stock can be sold and purchased by another investor(with the aid of a broker)in a to the corporation.Individuals own the majority of stock in the United States,and pension funds,insurance companies,and mutual funds own the remainder.

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