What Are Stocks or Shares?
It’s easy to hear people throwing around words like “stocks” and “shares” in conversation, but do you actually know what they are? The financial sector can at times seem intimidating and complex, but understanding the basics when it comes to stocks or shares is not as complicated as it may seem. This article aims to explain everything you need to know about stocks and shares in easy-to-understand language.
What are Stocks or Shares?
Simply put, stocks (or shares) represent ownership in a particular company. If you own stocks or shares in a company, it means that you own a part of the company, regardless of the size of your investment.
For example, if you buy shares in Microsoft, it means that you own a part of the company, even if it’s just a small amount. Stocks are traded on exchanges such as the New York Stock Exchange (NYSE), the Nasdaq Stock Market, and others.
Types of Stock
When it comes to stocks, there are two primary types: common stock and preferred stock.
Common Stock
Common stocks are the most popular type of stock. It gives shareholders the right to vote on company matters, such as the election of board members and other corporate decisions. Common stock holders also receive what’s known as “dividends,” which are essentially payments from the company based on the performance of the company’s stock.
Preferred Stock
Next is preferred stock. Preferred stock investors have a priority when it comes to dividends, meaning they get paid before common stock holders. In addition, in the event of a bankruptcy, preferred stock holders get paid before common stock holders. The downside is that preferred stock holders generally don’t get voting rights.
Benefits of Owning Stocks
There are many benefits to owning stocks.
One of the most obvious benefits is the potential for financial gain. Unlike other investments, stocks are capable of generating significant returns over a long period of time. Historically, stocks have averaged returns of 7-10% annually, thus providing investors with a source of passive income.
Another major benefit of owning stocks is that it provides some degree of security for your investments. Since stocks are typically sold in multiples (known as “lots”), it’s easier to recoup a part or all of your money in the event that the value of the stock decreases.
Additionally, ownership of stocks gives you a sense of ownership in the company itself. Taking part in the democratic process of a company can provide investors with a sense of fulfillment, regardless of the potential financial gains.
Risks Associated With Stocks
Of course, while there are numerous benefits to owning stocks, there are also risks.
The most obvious risk is that the stock could decrease in value. This is known as a “market risk,” and it’s one of the most significant risks associated with stocks. Additionally, the dividends issued to shareholders may not reach the expected amount and profitability declines could occur, resulting in losses for investors.
Furthermore, owning stocks carries with it the risk of the issuing company going bankrupt. In the event that this were to occur, shareholders may not receive all of their money back, or even any of it at all.
Finally, there are always unforeseeable risks which could lead to large losses for investors. For example, a major scandal at a company could lead to a decreased stock price, resulting in losses for investors.
How to Invest in Stocks
Investing in stocks is relatively straightforward.
The first step is to decide how to purchase your stocks. Generally, this is done through either a bank or a broker. Banks generally offer lesser fees, but will offer fewer options for stocks. Brokers, on the other hand, typically offer more options at slightly higher fees.
Once you’ve decided on a provider, you can begin researching stocks to invest in. Doing some preliminary research on a company’s financials, performance, and leadership is essential when considering where to invest your money. Additionally, be sure to compare fees between providers to find the best deal available.
Once you’ve found a stock or a portfolio of stocks to invest in, you can go ahead and purchase it. However, be sure to always keep your risk-tolerance in mind, as no one can predict the stock market’s movements with perfect accuracy.
Investing in stocks offers numerous potential benefits, such as generating passive income and the potential for long-term capital appreciation. However, it’s important to remember that there are risks associated with any investment, and stocks are no exception. Therefore, it’s always a good idea to do your research and make sure that you understand the risk-reward profile of any investment you’re considering.
