Energy Investing: Equities - dummies

By Nick Hodge, Jeff Siegel, Christian DeHaemer, Keith Kohl

Equity is the surplus profit of a company that’s distributed among energy investors after the firm pays off all liabilities. When you buy a company’s stock, you’re buying a share of this equity. Buying shares of stock means you own a piece of the company.

Owning shares gives you a right to a portion of the profits and the firm’s assets in case of liquidation, as well as voting rights in the company.

The two main types of stock are

  • Common stock: When people talk about stocks, this is what they’re talking about. The majority of stock is issued in this form. You get one vote per share to elect board members. The firm may offer a dividend, but it’s not guaranteed.

  • Preferred stock: This stock represents owning a piece of the company but usually doesn’t come with voting rights. Preferred shareholders are usually guaranteed a fixed dividend forever and are paid off before common shareholders, but after debt holders, in the event of liquidation.

Like commodities, stocks are traded on exchanges where buyers and sellers come together to determine price. These can be actual locations where transactions are executed on a trading floor or a virtual network where trades are made electronically. Thanks to the advent of these virtual exchanges, buying and selling stocks on your own is much easier.

When a company issues shares, it does so on the primary market by way of an initial public offering (IPO), where underwriters determine a price and sell directly to financial institutions. When most people stock, they do so in the secondary market, trading shares that have already been issued on an exchange. This table lists the major U.S. exchanges.

Major U.S. Stock Exchanges
Exchange Name Description
New York Stock Exchange (NYSE) Founded in 1792 and known as the Big Board, the NYSE is
the largest equity exchange in the world, home to the majority of
the world’s largest companies.
Nasdaq Founded in 1971 as the world’s first electronic exchange,
Nasdaq has become home to many high-tech stocks.
American Stock Exchange (AMEX) This exchange is owned by the NYSE and handles about 10 percent
of securities traded in the United States, most of them small-cap
stocks and exchange-traded funds.
Over-the-counter Bulletin Board (OTCBB) This is an electronic trading service offered by the National
Association of Securities Dealers (NASD), but it’s not part
of Nasdaq. This exchange has listing requirements, so you find
mainly smaller, younger companies here.

U.S. exchanges are the largest but still account for only a small portion of all the stocks traded around the world. Other major exchanges include the London Stock Exchange (LSE) and the Hong Kong Stock Exchange (HKSE). Foreign-based companies can list stock on U.S. exchanges provided they adhere to Securities and Exchange Commission (SEC) rules.