What are Stocks and How do they Work?

What are Stocks and How do they Work?

To achieve an understanding of the stock market and augment
your return on investment on a stock, it is essential that you look into the
basics of stocks and how they work.

The stock market, unlike popular misconception is not a work
of gamble, which is why experts claim that you always have ways to predict the
outcomes of your investment. This makes it essential for an investor to spend
his money mindfully in order to attain financial growth and stability. It is
quite likely for a person interested in investing money to be inclined towards
purchasing some kind of stocks. The past record of the stock market makes it a
famous and reliable investment method. Studies reflect that from the year 1930
to 2013, there was an average
return on investment of 9.7%.
Although this statistic involves some extreme
highs and devastating lows, the average return is reason enough for people to
dive into the stock investments.

The initial thought of stepping into a stock market can seem
intimidating and make even the most daring shirk away from investing in it.
However, once you learn the basic concepts that there are to learn about it and
have implemented the right practices which enable you to bag huge profits, it’s
all downhill from there. Even though, some people might tell you that there are
enough vehicles out there that enables a potential investor to get the exposure
to stocks, like mutual funds, that won’t have the obligation on him to get the
stock pickings, we would still highly recommend you to get an understanding of
stocks if you want to become a player in the market. This will enable you to
always have an upper hand while making a decision or taking on another, riskier
role.

There are some people who lean towards platforms or
tutorials to get a head start in the stock market. This is actually a good
practice as it minimizes the risks of losing money. However, we would advise
you to only get the best stock trading platform when you have decided to get
it.

So, what exactly are stocks?

A stock basically enables an investor to have a share in a particular
company. Stocks are also commonly referred to as “shares” or “equities”, which
true to their name represent your ownership of a part of a company. The
ownership comes with a few other perks which are different from stock to stock.
One of the features is that you could be eligible to vote at shareholder
meetings.

Organizations typically issue equities in order to fund
their business by raising capital. The amount which is then raised is used to
carry out different projects which will potentially result in the growth of the
business and bring a return on the investment of the stocks bought by
shareholders. To enable investors to purchase stocks of their company, owners
can go from private to public by issuing IPOs. Furthermore, they should also
have a 1-4 unique letters stock ticker symbol for investors to identify their
stock in the market.

Once the company goes public, the price of the stock is set
up based on what the market thinks the value of the company is. This value
fluctuates based on their successes and losses. While many people would tell
you that the capital generated through investments in stocks is apt enough for
companies to grow, they would also shed light on the pitfalls of it. First,
there is a huge price that a company has to pay in order to be listed on an
exchange. Secondly, you have to report details of all your gains, losses and
investments to your shareholders, follow all the rules and be constantly under
the pressure of pleasing your investors and listening to their suggestions
about how you should run the business despite not wanting it.

Types of stocks

Stocks are basically categorized into two types: common
stock and preferred stock.

The difference between common stocks and preferred stocks is
that common stocks offer voting rights to the investors. When an individual
invests in a common stock, he is basically looking for a part of a company,
with capital gains and a dividend. However, bear in mind that the corporation
owners are under no requirement to pay a dividend too. A dividend represents a
reward or some kind of earnings given to the investors for making an investment
in the company, but it is not obligatory.

On the other hand, preferred stock is different from common
stock. First, you probably won’t get any voting rights in the shareholder
meeting if you opt for a preferred stock. However, by giving up those voting
rights, you get a much more significant portion of finances to your name by
opting for preferred stocks. So, let’s assume that a company decides to give
dividends to its investors, if that happens, it will prefer to pay its
preferred stock holders first before it moves on to the common stock holders. In
addition to that, common stocks are considered to be on the risky side as
compared to preferred stocks. Therefore, you ought to have a mix of common and
preferred stocks in your portfolio to enhance your investment, and gain an
edge.

Although, the common types of stocks are just these two, it
is essentially up to the owners of the companies to customize their stocks
whichever way they want. The customization of stocks is typically done in order
for the voting rights of the company to be only given to a certain group of
people and not the outsiders. This is actually how Facebook does it. When there
is more than one classification of stocks, it is described as stock A, stock B,
etc.

Final Words:

Stepping in the stock market is not a simple trip but a
journey that teaches you a lot and drives you through different pathways. There
are always new things that can be learned and new strategies that you could
implement. When you dip your toes in the market, make sure to remember that
gambling doesn’t work in the stock market, but mindful calculations do. Above
all, to be successful you need to be determined to learn.

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