- Bonds and stocks are the two main financial instruments that allow investors to invest in a company. In exchange for the use of investor funds, companies can issue bonds or equity in the company. Equity is distributed in the form of stocks issued to the investor. In order for a business to issue shares of stock, it must apply to become a company through its state of operation -- usually the department of revenue. Both the state department of revenue and the federal Securities and Exchange Commission act as regulating authorities for all public companies.
Common and Preferred
- Companies can issue two types of stock, common and preferred. Common stock has voting rights and stockholders are paid in the form of share price appreciation or dividends. Preferred stock is senior to common stock in terms of bankruptcy and credit; however, it has no voting rights.
- After a company is authorized shares of stock, it can sell them to the public. Shares outstanding refers to all shares of stock currently in the hands of investors. It does not include treasury stock, which is the stock purchased by the company. A company that wants to reduce its number of outstanding shares in the market can buy back its own shares.
- Earnings per share (EPS) is one of the most commonly used metrics of share performance used by investment analysts. For instance, if a company has one million shares outstanding and declares a net income of $100,000, the EPS is net income divided by the number of shares outstanding. In this example, the EPS is $100,000 divided by one million, or 10 percent.