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How do stocks work?

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Quick Answer

Stocks are publicly traded shares of ownership in a company that can be bought and sold by investors like any other commodity. Holding shares in a company entitles the holder to a share of the profits, voting rights in how the company is run and, potentially, a profit when the shares are later sold.

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Full Answer

Companies float shares when they are in need of financing. Unlike bonds, which are a form of debt-financing, sale of stock provides the issuing company with money that doesn't have to be paid back with interest. By floating shares in the company's equity, the management of that company is able to spread out the risk of doing business among many individual and institutional investors.

Owning stock in a company is equivalent to buying a small piece of the business. A 10 percent share, for instance, entitles the bearer to 10 percent of the company's profit, which may be reinvested in the company's operations or taken as a payment known as a dividend. Shares in a company also confer voting rights at stockholder meetings and so give the bearer a voice in major decisions regarding the way the company is run. Stocks can also be traded on exchanges. Investors who buy low-priced stock can sometimes resell it later at a higher price. The difference is then kept as profit.

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