Before we delve into that, let’s talk about what a stock is. Stocks or shares or equity are used synonymously in the financial sphere. In financial parlance, these three terms mean the same. When an individual possesses stocks in a company, that person is called a shareholder or a stockholder. That means he or she is entitled to claim portions of the company’s assets and income. Now the stock market is where exchanges like buying and selling of company shares happened between investors.
Now an asset is something that is possessed by an outfit whether it is a company or a person. An asset has a value that can be used to meet obligations and debts. Liquid assets are assets that are easily changed to cash. Real estate, factory equipment — those that cannot easily be changed to cash — are called physical assets.
Let’s further about assets. Let’s learn the terms financial assets and real assets. Real assets are physical and tactile. They have intrinsic value. Financial assets are paper assets that are quickly convertible to cash. So, stocks are assets. That question has been answered. The next question is — Which category do stocks fall in?
Definitely, a stock or a share or equity falls under the financial assets category. So if you’re an investor, stocks are considered assets. You own a property, the property has value and that property can be convertible to cash. As a business owner, stocks are used for the capital flow. This capital is used to purchase equipment and/or properties, pay for operational costs, and used as savings. This goes to show that stocks are not defined the same way for a company and as an asset to a shareholder or a stock investor. This is where the lines get blurred. Regardless of the definition, do you think stocks are clearly assets?
To answer this question, let’s look into the balance sheet — an understanding of how this sheet is obtained for a business will make things more clear. What is a balance sheet? It is a statement that is divided into three parts and it summarizes all assets and liabilities and shareholder equity. The equation for this is Assets minus Liabilities plus Shareholder Equity.
If you look at the equation, you will see that stock is under shareholder equity, and it is neither a liability nor an asset. Even so, you see it on the other side of the assets equation; therefore should it be regarded as more of a liability than an asset? Perhaps it is more of a liability when the shareholder requests for a cash-out, the cash cache will decrease in order to pay back the shareholder the current value of the stocks.
The aforementioned stock is called common stock. There is another one called preferred stock. Before we move forward, let us first define the main difference between common stock and preferred stock. The latter serves more like a bond with a set dividend and redemption price while the former’s dividends do not have more guarantee and carry more risk of loss should a company fail.
These two stocks — common and preferred stock— are under the shareholder equity in the balance sheet equation. Again, it’s not that simple. The purpose of the balance sheet will show the liquidity of the company. Now common stocks are more easily to liquidate compared to preferred stocks. Common stocks are dependent on the company’s profits. The stockholder of the preferred stock gets the preferred stock at a costlier price and is occasionally deemed as a crossbreed between a common stock or a bond. If you look at a balance sheet, both common stocks and preferred stocks are under the section of the shareholder equity. That being said, both are not considered assets to the company. The money derived from the stock sales — is considered an asset.
What are the benefits of owning stocks? Well, if you are a shareholder, you can lay hold on the assets of the company. However, this is applicable only when the company will liquidate. The shareholders can claim what is left after the assets and liabilities are counted. Therefore, stock investments have more risk compared to credit and loans. It’s possible that the shareholder will not receive anything.
As a shareholder, you can also have the power to vote for management changes. That means you have the power to negotiate the plans and decisions of the management’s plans and strategies. Also, since a shareholder’s ownership in a company is limited, the shareholders will not be personally liable should the company incur losses. A shareholder may also receive profit — these are given in divvies or dividends. You may get the divvies per quarter or per year. Or you may retain all the earnings for business expansion. As a shareholder, you can also benefit from capital gains should the stock price appreciate.