Stocks

Shares as a concept are very easy to understand, they simply represent the ownership of a fraction of the corporation and entitles the owner to profits earned by company proportional to how much stock they own.

The terms "shares" and "Stock" are often used interchangeably. Of the two, "stocks" is the more general, generic term. It is often used to describe a slice of ownership of one or more companies. In contrast, in common parlance, "shares" has a more specific meaning: It often refers to the ownership of a particular company. So if someone says she "owns shares," some people's inclination would be to respond, "shares in what company?" As you can see the difference between the two terms has more to do with syntax than with financial or legal accuracy and hence these two terms can be used interchangeably.

When a company generates a profit, this profit belongs to the owners of the company i.e. the shareholders. The amount paid to the shareholders after earning a profit is called dividend. The company might not pay all the profit as dividend, but rather use some amount to invest in its growth. At first glance this might seem to hurt the interests of the investors, but if the company grows, the company's evaluation increases thus making the investors' investment more valuable.

It is important to understand that stock holders do not own corporations; they own shares issued by corporations. The corporation owns its own assets. A corporate office full of chairs and tables belongs to the corporation, and not to the shareholders. This distinction is important because corporate property is legally separated from the property of shareholders, which limits the liability of both the corporation and the shareholder. If a company goes broke it might have to sell all its assets to cover its debt but the investment of the shareholder, other than drastically loosing value, would remain intact. Similarly if a major shareholder falls under debt, he or she cannot sell the companies assets to pay the debtors.

Dividend discount method is a way to try and approximate the value of a stock. It takes into consideration the future dividends, the growth rate of the company and the return rate expected by investors. The actual price of the stock however is determined by the market and has several factors like politics, change in regulation, price in commodities, interest rates at banks etc.