Stocks are investments that provide you the chance to hold stock in a public company.
Stock Definition and an Example
Stocks signify ownership in a corporation that is publicly traded. You take a stake in a firm when you purchase its shares. If a corporation has 100,000 shares, for instance, and you purchase 1,000 of them, you will own 1% of the business. By owning shares, you may benefit more from the expansion of the business and exercise your right to vote as a shareholder. Shares and equity are some alternate names.
- Stocks are fractional shares of a firm.
- A stock can be profitable primarily through dividend payments and an increase in share price.
- Stocks can be categorized by industry, price, or value.
How Stocks Work
Companies sell stocks to raise money for corporate expansion, the introduction of new products, or debt repayment. The term “initial public offering” (IPO) refers to the first time a corporation issues shares to the general public. Stockholders can sell their shares on the stock market after the IPO, where supply and demand determine pricing.1
The price will decrease the more stock that is made available for purchase. A stock’s price will increase the more people acquire it. Typically, stock purchases and sales are influenced by expectations for business profits or earnings. The price of a stock increases if traders believe a company’s earnings are high or will increase further.
Selling shares for more money than they were originally purchased is one method owners can recover their initial investment. You could lose some—or even all—of your investment when you sell if a company performs poorly and its shares lose value.
Capital gains are the profit received from selling a stock.
Dividends are another method shareholders make money. These are per-share payments that are made quarterly from a company’s profits. It is a method of thanking and compensating stockholders—the true owners of the business—for their investments. Companies that are profitable but do not experience exponential growth are particularly significant for dividends because they either:
being in a stage of the company’s lifespan that is mature or stable.
the nature of the industries they work in (such as utilities versus technology).
Value or blue-chip stocks are common names for well-liked dividend-paying stocks.
Derivatives, which draw their value from underlying assets, such as stocks and bonds, are the third, riskier option to profit from equities.2 Stock options allow you the choice to purchase or sell a stock by a specified date and at a specified price.
The right to purchase at a specified price is a call option. By buying the stock at the lower fixed price and selling it at the higher current price, you can profit when the stock price increases. The right to sell something is known as a put option. When the stock price drops, you profit. Then you purchase it at tomorrow’s lower price and sell it for the higher price that was previously agreed upon.
To get the best return for the least risk, the majority of financial advisers will advise you to keep to investing in and holding equities for a long time inside a diversified portfolio.
Primary Types of Stocks
There are two main types of stocks: common and preferred.
The Dow Jones Industrial Averages and the S&P 500 are used to track common stocks. When they are traded affects their values. The board of directors, mergers and acquisitions, and takeovers are just a few of the corporate matters that common stockholders can vote on.5
Common investors, on the other hand, come in last in the payout hierarchy behind the company’s bondholders and preferred stockholders in the event that it declares bankruptcy and liquidates its assets.
While lacking voting rights, preferred stocks are nevertheless an ownership share in a corporation. Due to the fact that dividend payments are predetermined, holders are aware of the precise rate of return to anticipate. Preferred stocks can change into other types of ownership.
Other Types of Stocks
There are additional ways to categorize equities outside those basic divisions.
Stock Industry Sectors
Stocks can also be categorized according to the traits of the companies that issued them. These various affiliations satisfy the various needs of shareholders. By industry sector, stocks can be categorized, including:
- Basic materials: Companies that extract natural resources
- Conglomerates: Global companies in different industries
- Consumer goods: Companies that provide goods to sell at retail to the general public
- Financial: Banks, insurance, and real estate companies
- Healthcare: Healthcare providers, health insurance, medical equipment suppliers, and drug companies
- Industrial Goods: Manufacturing companies
- Services: Companies that get products to consumers
- Technology: Computers and software
- Utilities: Electric, gas, and water companies
Stocks can also be categorized based on their value and potential. Growth stocks typically don’t pay dividends but are predicted to rise quickly. Investors frequently assume that even if a company may not yet be profitable, its stock price will increase. These are frequently newer businesses with lots of potential for expansion and model modifications.
A corporation is said to have a value stock if its stock is currently trading for less than its fundamentals, such as dividends or other metrics or multiples. It is not anticipated that the stock’s price would increase much. These are typically established, substantial businesses that the market shuns. Smart investors believe the costs are too low for the services the companies provide.
Although blue-chip stocks are fairly valued and may not experience rapid growth, they have a long history of success in dependable sectors. They are regarded as safer investments than growth or value equities and pay dividends. They may also be referred to as “income stocks.”