Capital stock is the whole shares of ownership in a company divided into smaller shares. In American English, the stocks are collectively referred to as “stock”. Each share of this stock represents a fractional share in proportion to its value. There are different kinds of stocks such as common stock, preferred stock, warrant stock, debt stock and equity stock.
The ownership rights of capital stock are determined by laws that are passed by the legislative body. One of these legislations is the Dividend Reinvestment Plan (DRIP). It is essentially a plan that allows a company to pay out regular dividend payments periodically. In return for the dividend payments, the shareholder is entitled to immediate return of his subscription. These plans are usually sponsored by companies who are highly interested in generating sustainable long term profits.
Generally, there are two different ways to issue capital stock: direct and indirect. A corporation issues units or ‘pieces’ of property and then issues authorized shares of that property to particular authorized shareholders. A shareholder is then entitled to receive dividends on his shares. One of these dividends is paid direct by the company and another is paid indirectly through the Discount Window Trading System (DBS). The term ‘authorized holder’ refers to any shareholder who receives an authorized share or dividend.
The par value of capital stock is defined as the price per share that the company will pay for all the outstanding shares of that stock. All shareholders will see their shares increase in value each day unless they sell or buy new shares. Any time that a shareholder sells or buys new shares, their shares lose in value until the next meeting of shareholders.
Generally, there are two methods to issue new equity: issuing new stock directly or by creating new accounts in the form of preferred stock. There are two main differences between these methods. First, with issuing new stock directly, there is no trading of existing securities, unlike when you trade debt security. Second, with issuing new equity, you have the opportunity to buy new shares at the current price and pay the issuing company for them. The only way that a debt security can be traded is if you are also buying and selling debt securities.
Because it represents ownership in a business, capital stock has its advantages. To begin with, when an investor owns a substantial amount of capital stock, he is afforded more options. As an owner, you have the ability to choose how much you want to invest. For instance, while some investors may choose to invest in a wide variety of businesses, other investors may only be interested in businesses that make a significant profit.
Because you own a great deal of capital stock, when a company makes a profit, a portion of your investment will be made available to you as profit. Conversely, when a company loses a large portion of its investment, you are affected negatively. Of course, you have the option of selling your shares for less than you paid, thereby reducing the amount of loss that the company has experienced. However, if you choose not to do this, you will have essentially lost all of your investment. If you do not like these losses, you are encouraged to sell your shares as quickly as possible to minimize the amount of loss.
As you can see, it is possible to purchase a large amount of shares at one time, as is the case with most types of investment. However, you may be restricted by the method in which you purchase these shares. When you purchase capital stock in the form of par value per share, you are limited to purchasing a specific number of such shares at one time. If, for instance, you are interested in purchasing a large number of common shares for a business you own, you may be advised to obtain individual common stock issued by that business in order to achieve your investment goal.