Types of Equity Ownership
Stocks are the units that represent the ownership interest in a given company. Stocks are generally issued by companies in anticipation of issuing further stock or by the government in anticipation of selling additional stocks. Stock is all the outstanding shares in a company that have not yet been acquired or sold. In American English, the stocks are collectively referred to as “stock”. A single share of stock represents a fractional share of all the company’s outstanding shares in percentage form.
In a mutual company, each of its shareholders creates an interest in the company and his ownership is determined by his contractual rights. These rights are expressed in terms of dividends paid to shareholders and capital gains and losses. All publicly traded corporations in the United States are required to register with the Securities and Exchange Commission and to obtain an exchange listing from the National Association of Securities Dealers (“NASD”). The registered company becomes a publicly held company once it issues more than $1 million in stock. It then becomes eligible for sale on the open market either through a public offering or by a private placement, subject to fulfillment of certain listing requirements.
The major exchanges where stocks are traded are Over the Counter Bulletin Board (“OTCBB”) and Pink Sheet. Over The Counter Bulletin Board (“OTCBB”), also known as OTCBB, is the largest stock exchange in the world. OTCBB offers stocks of many different countries, including U.S. stocks. OTCBB does not permit short selling or leveraged trading, so it is not suitable for raising capital. However, many brokers provide OTCBB-traded stocks to raise capital.
Private placements represent individual investors’ funds in stocks. Funds can be raised for a variety of purposes, such as making loans or buying tracts of land. Investors use market capitalization and stock price to make their investment decisions. There are many advantages to this type of placement. First, they are not subject to the same listing requirements as OTC stocks. Second, they do not incur the taxes and other fees that accompany regular day traders transactions.
Another advantage of investing in the OTCBB is that it provides a marketplace for small businesses. Because there are limited but wide-ranging exchanges, there are opportunities to buy a niche company at a low price and then turn around and sell it for a profit when it receives enough growth in profit. Many of these companies are able to survive for years in this market, even after the emergence of major exchanges such as NASDAQ.
There are advantages and disadvantages associated with both types of equity ownership. Long-term investors are not exposed to the credit risks inherent in owning stocks. Also, the purchase of multiple common stocks can give an investor the feeling of owning a piece of the company’s future success. Because of this potentiality, there is some value added to the price of a stock listed on an OTC BB. The downside, however, is that an investor must have a sufficient amount of purchasing power in order to achieve a meaningful return on investment.