The world of stock trading can be difficult to participate in if you do not know how everything functions. This is why we are offering a brief introduction to explain what stocks are and how investors use them.
Stocks (or shares, equities), in short, are securities that represent a portion of ownership in a corporation. A single individual can buy many of these stocks to boost their share of ownership within a company. Stocks allow investors to profit from a corporation’s earnings, and these profits are received by means of dividends issued by the company. Once a stockholder buys a stock, however, they may not simply return the stock to the company for profit. What investors can do is sell their stocks to other investors for direct financial benefit.
Businesses create stocks for investors to buy, with the hope of raising funds for their company. They then sell these stocks through the stock market exchange. When companies open these stocks to be sold, they present a starting bid price, or an initial public offering (IPO). In return, buyers offer a bid price. When the buyer and seller come to an agreement, they exchange the stock. The value of these stocks may rise or fall, which reflects evaluations completed computationally according to supply and demand. Traders may then buy or sell stocks with other traders through stockbrokers, in accordance with these evaluations.
Stock traders usually employ one of two strategies. The first is active trading, which involves careful monitoring of events that may affect the value of a stock. Investors subsequently sell said stocks to take advantage of an opportunity that may arise. Investors usually employ this strategy over a long period, usually weeks and months. The other strategy is day trading, which involves buying and selling a stock within the same day, taking advantage of sudden market fluctuations. It does not require an investor to closely study the behavior of the market and a company, unlike active trading.
When an investor buys a stock, they do not own a portion of the company itself, but solely the stock. This is enforced legally, as it allows for a judge to compensate investors in the event of a company declaring bankruptcy. The investors would, therefore, not have to rely on the company’s assets in order to receive payment. This separation of stocks from the company property is also important for the company themselves. It means that investors cannot simply take a portion of the company’s funds with them when they so choose.
Types of Stocks
The two primary forms of stocks are common and preferred stocks. Someone may invest in common stock and receive dividends on some of the profits a company may make, although these dividends are not guaranteed or fixed. A common stockholder can attend meetings where they can vote on the company’s policies and elect board members (their voting power would be in proportion to the number of stocks they have invested in a company).
The greatest benefit of a common stock is that they have the greatest likelihood of being the most profitable option for stock trading in the long-term. The power a company gives an investor with these stocks boosts trust in said company. The downside, however, is that relying on common stocks can come at a greater risk for the investor. This is due to the possibility that a company may lose all their funds and declare bankruptcy, in which case a court will pay stockholders who hold common stock last.
Preferred stocks tend to allow fewer choices for an investor when it comes to voting, but they receive guaranteed fixed dividends to compensate for this. They are also a priority for payment when a company may go bankrupt. This means they are a more stable and dependable forms of investment. However, a company may purchase a preferred stock from an investor at any time. Fortunately, the price they pay will usually be at a premium.
Stocks come in classes, Class A or B. The general difference between the two is that Class A stocks may have higher voting rights than Class B stocks. Both types can be either common or preferred.
Another common form of investment in a company is a bond. Although they are not an actual form of stock, investors use them frequently as they may be of greater benefit to them. Bonds are a type of debt which companies should eventually repay investors, along with payments for interest. A court would make them the highest priority to reimburse if a company goes bankrupt. Bonds are, therefore, the most reliable form of investment in a company.
In conclusion, these investments mainly differ in their risk. While preferred stocks may be less risky than common stocks, common stocks are far more likely to result in greater profit.