What is ‘Stocks'
Definition: A stock is a general term used to describe the ownership certificates of any company. A share, on the other hand, refers to the stock certificate of a particular company. Holding a particular company's share makes you a shareholder.
There is also something called ‘convertible preferred stock'. This is basically a preferred stock with an option of converting into a fixed number of common shares, usually any time after a predetermined date.
What Is Shareholder Ownership?
What shareholders own are shares issued by the corporation, and the corporation owns the assets held by a firm. If you own 33% of the shares of a company, it is incorrect to assert that you own one-third of that company. However, you do own one-third of the company’s shares. This is known as the “separation of ownership and control.”
Owning stock gives you the right to vote in shareholder meetings, receive dividends if and when they are distributed, and the right to sell your shares to somebody else.
If you own a majority of shares, your voting power increases so that you can indirectly control the direction of a company by appointing its board of directors.4 This becomes most apparent when one company buys another.
The acquiring company buys all the outstanding shares.
The board of directors is responsible for increasing the value of the corporation and often does so by hiring professional managers, or officers, such as the chief executive officer, or CEO. Ordinary shareholders do not manage the company.
The importance of being a shareholder is that you are entitled to a portion of the company's profits, which is the foundation of a stock’s value. The more shares you own, the larger the portion of the profits you get. Many stocks, however, do not pay out dividends and instead reinvest profits back into growing the company. These retained earnings, however, are still reflected in the value of a stock.
What kinds of stocks are there?
There are two main kinds of stocks, common and preferred.
Common stock entitles owners to vote at shareholder meetings and receive dividends.
Preferred stockholders usually don’t have voting rights but they receive dividend payments before common stockholders do, and have priority over common stockholders if the company goes bankrupt and its assets are liquidated.
Common and preferred stocks may fall into one or more of the following categories:
- Growth have earnings growing at a faster rate than the market average. They rarely pay dividends and investors buy them in the hope of capital appreciation. A start-up technology company is likely to be a growth stock.
- Income pay dividends consistently. Investors buy them for the income they generate. An established utility company is likely to be an income stock.
- Value have a low price-to-earnings (PE) ratio, meaning they are cheaper to buy than stocks with a higher PE. Value stocks may be growth or income stocks, and their low PE ratio may reflect the fact that they have fallen out of favor with investors for some reason. People buy value stocks in the hope that the market has overreacted and that the stock’s price will rebound.
- Blue-chip are shares in large, well-known companies with a solid history of growth. They generally pay dividends.
Another way to categorize stocks is by the size of the company, as shown in its market capitalization. There are large-cap, mid-cap, and small-cap stocks. Shares in very small companies are sometimes called “microcap” stocks. The very lowest priced stocks are known as “penny stocks.” These companies may have little or no earnings. Penny stocks do not pay dividends and are highly speculative.
How to Buy Stocks
To buy stocks, you’ll first need a brokerage account, which you can set up in about 15 minutes. Then, once you’ve added money to the account, you can follow the steps below to find, select and invest in individual companies.
There are 5 step according from our research:
1. Select an online stockbroker
2. Research the stocks you want to buy
3. Decide how many shares to buy
4. Choose your stock order type
5. Optimize your stock portfolio
Some good rules of thumb to remember about buying stocks online are to find an easy-to-use broker, research the stocks you’re interested in, decide how much you want to invest, choose an order type that makes sense for you, and then monitor your stocks (but not too closely). If you can complete these steps, you’ll be well on your way to building a stock portfolio like a pro.