What are Stocks?


Owning stocks allows you to be an investor in a public company. Stocks are simply a share of the company’s ownership. 

 

It doesn’t matter if you call it stocks, shares, or equity, it all refers to the same thing. A stock is a claim on the earnings and assets of a company.  You are one among many owners, also known as shareholders. This gives you a claim, though usually very small, to all the company’s assets. As an owner, you are entitled to a share of the earnings and any voting rights that come with the stock. Your ownership stake in the company grows, as you acquire more stock.

To raise funds, companies sell shares in their businesses. Stock shares are a way for companies to raise capital to finance their operations.  The money is then used for different purposes. A corporation, needs money to pay expenses, like expanding into new markets, launching new products, paying off debt, and hiring new people. To raise capital, they issue stock shares.

Stocks are primarily bought and sold on stock exchanges. The initial public offering, or IPO, is the first time that a company issues stock to the public. Stockholders have the right to resell their shares at the stock exchange, where prices are determined by supply and demand.

Stock units are known as shares.  For example, if a company has 10,000 shares and you purchase 100, you will own 1% of the company’s shares, and claim on the company’s earnings and assets. 

Stock certificates are the representation of a stock. This piece of paper is proof that you own the stock. Nowadays, you rarely see physical certificates of shares as brokers store documents electronically. This is also called holding shares in street name. This allows shares to be traded more easily. 

 

How do stocks work? 

You can get certain benefits when you purchase shares of stock in a company, depending on which type of shares you have.

Capital Appreciation. The first benefit is the potential for capital appreciation. Capital appreciation means an increase in the value of your stock.  If the stock price rises, your shares will increase in value. Shareholders can make a profit by selling their shares at a higher price than they were bought. However, if the stock price falls, your shares will fall in value.  If a company fails to perform well and shares drop in value, it is possible to lose some, or all, of your investment.

Dividends.  Another benefit is dividends. You could be eligible to receive a portion of the company’s profit with dividends. These are regular payouts of a percentage of profits to shareholders. Dividends may not be paid by all companies, such as young, expanding companies. Instead, they reinvest all their profits in the hope of growing further and generating greater profits.

Voting Rights. Next is voting rights. At the annual shareholder meetings, you may be eligible to vote. Stocks give you an ownership stake in a company but it doesn’t necessarily mean that you have the right to participate in its day-to-day operations. You can vote once per share to elect the directors at the annual meetings. 

While management is expected to increase the value for the shareholders, If that doesn’t happen, shareholders have the option to vote to remove the management.  Also, you can sell your stock if you are not satisfied with the company’s management or performance and find a new place to invest your money.

Limited Liability.  Stocks also have limited liability. This means that you, the stock owner, are not personally responsible if the company fails to pay its debts. Stock ownership means that you cannot lose more than the amount of your investment, regardless of what happens. You can’t lose your personal assets even if a company in which you are a shareholder goes bankrupt.

 

Why do people purchase stocks?

Stocks offer the possibility to grow your money but remember there are also significant risks.

Investors use them to help grow their savings and for planning for long-term financial goals such as retirement and education. Your savings balance will increase as stock prices rise or as you gain from dividends. Though, stock prices can also fall, sometimes losing all their value or becoming worthless. 

Many use stocks as a way to help diversify their investment portfolio. To help reduce risk, investors buy stocks from companies large and small across a variety of industries and geographies. Diversifying your stock portfolio can allow you to benefit from growth in certain sectors and offset losses in others. Also, many investors don’t buy individual stocks, but instead invest in funds that do the individual stock investing for them such as mutual funds or ETFs, or use a financial advisor to help them. 

Stocks, are an important part of many peoples long-term investment strategy.  You can become comfortable enough to start investing money in the future by taking a little time to understand stocks basics, and learn more about investing. 

 

Information is for educational and informational purposes only and is not be interpreted as financial advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.

Categories Investing and Financial Planning, Personal Finance
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