What are stocks? Definition
Stocks represent ownership interests in companies. Thus, a stock is a financial instrument that certifies the shareholder’s ownership of a portion of the share capital of a corporation. Shareholders are guaranteed property rights and the right to have a say in company matters.
Types of stocks
Not all stocks are the same. The following distinctions are important:
- Bearer stock and registered stock
Stocks are classified as either bearer stock or registered stock based on how they are transferred. Bearer shares, in which the owner is not named and ownership is the determining factor, represent the most common category of shares. This type of share is traded on the stock exchange. Registered shares are rather rare. They are issued in the name of a specific person. Only the named holder may exercise all rights associated with ownership of the certificate. They are usually traded within a very small circle. - Common stock and preferred stock
Shareholders’ rights vary depending on the type of stock they hold. Only holders of common stock (“common shares”) have voting rights at the annual general meeting, and these voting rights depend on the size of their stake. Holders of preferred shares, on the other hand, often have no voting rights. However, they generally enjoy the benefit of higher dividend payments. When people refer to “shares,” they usually mean common shares. Since many companies have standardized their share capital in recent years, preferred shares have become less common.
Influence and returns
Shareholders can exercise influence over their company at the annual general meetings, which are typically held once a year. The Annual General Meeting decides on important corporate actions, such as acquisitions or mergers, as well as the dividend. Other important responsibilities of the Annual General Meeting include electing the Supervisory Board and making decisions on capital measures (e.g., capital increases). Voting rights at the Annual General Meeting are exercised in proportion to the shareholder’s stake in the company. However, these rights apply without restriction only to holders of so-called common stock. The Supervisory Board, elected by the Annual General Meeting, represents the interests of the shareholders. It is a statutory supervisory body whose primary responsibilities include appointing, advising, and overseeing the Executive Board, as well as auditing the annual financial statements. The Supervisory Board must meet at least four times a year. The Executive Board of the stock corporation manages the company’s business and must report regularly to the Supervisory Board.
