Stocks: What Are They?

Stocks are a type of investment that allows you to purchase a share of a publicly traded company.

Find out more about stocks, how they function, and how they may help you build money.

What Are Stocks?

Stocks are ownership stakes in a publicly traded corporation. When you purchase stock in a corporation, you become a part-owner of that firm. For example, if a corporation has 100,000 shares and you purchase 1,000 of them, you own 1% of the company. Owning stocks helps you to profit more from the company’s development and grants you voting rights as a shareholder.

1. Alternative name(s): shares, equity

How Stocks Work

Companies sell stocks to raise capital to expand their operations, create new products, or pay off debt. The initial public offering (IPO) is the first time a firm sells stock to the general public . Stockholders can resell their shares on the stock market after the IPO, where prices are determined by supply and demand.

The more people who sell a stock, the lower the price; the more individuals who purchase a stock, the higher the price. People generally purchase and sell stocks based on their expectations of business earnings or profits. If traders believe a company’s earnings are high or will climb higher, they bid up the stock price.

Shareholders might get a return on their investment by selling shares at a greater price than when they were obtained. If a firm works poorly and its shares lose value, shareholders may lose some or all of their investment when they sell.

📝Note: Capital gains are the profits generated from selling a stock.

Dividends, which are quarterly payments dispersed on a per-share basis from a company’s earnings, are another method shareholders profit. It is a method of rewarding and incentivizing investors (the real owners of the firm) to invest. It is especially critical for firms that are profitable but not rapidly growing.

The third and riskier way to earn from stocks is through derivatives, which are based on underlying assets such as stocks and bonds.

Stock options provide you the right to purchase or sell a stock at a certain price by a predetermined date.

A call option is the right to buy something at a specific price. When the stock price rises, you profit by acquiring it at a set lower price and selling it at the current price. A put option is the right to sell an asset at a certain price. When the stock price falls, you profit. In such instance, you buy it at the reduced price of tomorrow and sell it at the agreed-upon higher price.

📢Important: Most financial planners would encourage individual investors to adhere to long-term stock purchases and holdings within a diversified portfolio to achieve the maximum return for the least risk.

Types of Stocks

Stocks are classified into two types: common and preferred. The stocks monitored by the Dow Jones Industrial Averages and the S&P 500 are widely traded, and their prices fluctuate depending on when they are exchanged. Common stockholders have the right to vote on corporate matters such as the board of directors, mergers and acquisitions, and takeovers.

However, if a firm declares bankruptcy and liquidates its assets, common investors are paid last, after bondholders and preferred stockholders.

Aside from these two categories of stocks, there are other methods to classify stocks based on the characteristics of the company that issued them. These various groups cater to the various demands of stockholders. Stocks can be classified according to their industry sector, which includes:

1. Basic materials: Companies that mine natural resources

2. Conglomerates: Global corporations from many industries

3. Consumer goods: Companies that offer items to the general public at retail prices

4. Financial: Banks, insurance businesses, and real estate firms

5. Health care: Health-care providers, health-insurance providers, medical-equipment suppliers, and pharmaceutical firms

6. Industrial Goods: Manufacturing companies

7. Services: Companies that deliver things to customers

8. Technology: Computer, software, and telecommunications

9. Utilities: Electric, gas, and water companies

They can also be classified according to their potential and worth. Growth stocks are projected to rise rapidly, but they rarely pay dividends. Companies may not even be earning a profit at the moment, but investors anticipate the stock price will climb. These are often newer enterprises with a lot of space for expansion and modifications to their business plan.

Dividends are paid by value stocks since the stock’s price is not projected to grow significantly. These are often enormous firms that are uninteresting, therefore the market has neglected them. Savvy investors believe the price is too low for what the firm provides.

Blue-chip stocks are fairly valued and may not develop rapidly, but they have shown to be trustworthy corporations in solid industries throughout time. They provide dividends and are thought to be a more secure investment than growth or value equities. They are also known as income stocks.