Initial Public Offerings

• Most people who buy stocks pay another investor for his shares rather than buying the shares from the company itself. For a company to be paid for its stock, it must sell shares through an initial public offering (IPO). An IPO is brokered through an investment company that has a membership on one of the stock exchanges. Once stock has been purchased through an IPO, it can be bought and sold by other investors.
  
  

Equity

• Stocks are sometimes referred to as equities. This means they represent ownership in the company. When you buy a company's stock, you become a partial owner of the company. The percentage of ownership that one share of stock represents depends on the number of stock shares outstanding. For example, if a company issued only 100 shares of stock, each stock would represent 1 percent ownership in the company that issued it.
  
  

How Stockholders Are Paid

• A company is in business to make money, and investors invest because they wish to benefit from a company's earnings. Stockholders are paid in one of three ways. A company can choose to distribute a portion of earnings through cash dividend payments. If a company pays a dividend, you will receive a cash payment for each share of stock you own. A company may, however, choose to reinvest money for the future. If the company's investments are successful, more buyers will be willing to pay higher prices for the stock, and the share price will rise over time. Finally, a company can choose to reduce the number of shares outstanding through a stock buyback program. When outstanding shares are reduced, your percentage of company ownership increases and this usually results in higher share prices.
  
  

Types of Stock

• The two basic types of stock a company can issue are common stock and preferred stock. Common stock is the most typical. Common stockholders have voting rights at shareholder meetings, and they can participate in share price growth as well as dividend payments if the company chooses to issue them. Preferred stock is a type of stock that guarantees dividend payments. Because preferred stock provides its owners with a steady income, the share price tends to be more stable and preferred stock owners make most of their money through dividend payments, not share price growth.