When a privately owned company decides to sell stock to the public, they often divide the company into “shares” of stock and sell them to the general public. This is often done to help the company raise money to carry out the goals of the company, such as expansions and improvements. When you buy a share of stock, you have an ownership share in that corporation and are entitled to part of that corporation’s earnings and assets. Stock investors are also known as shareholders or stockholders.
Stock comes in two types: common and preferred. If you buy common stocks, you become part owner of a company. Common stock owners elect directors, who hire the people that manage the company on a day-to-day basis. The value of the shares is directly related to the performance of the company. If the company grows or makes a profit, the value of your shares goes up. If the company has a disappointing year, the value of your shares goes down. If the company goes bankrupt, you could lose your entire investment. Preferred stock usually has no voting rights, but is first in line for dividends and first call on assets if the company is dissolved. The dividends paid on preferred stocks are fixed and guaranteed. Investors buy preferred stock for the dividend income.
Stocks don’t have a fixed value. Their values are always fluctuating and you can sell your stocks at any time. Because of this, when you sell, you sell them for what they are worth at that moment. If that’s more than you paid for them, you’ve earned a profit from selling your shares. If the price of your stocks has fallen below what you paid for them, you’ll be losing money if you sold them that day.
The main reason that investors buy stock is for capital appreciation and growth. History has repeatedly demonstrated that stocks have provided a higher average annual rate of return than other investments over long periods of time. Correspondingly, though, stocks are generally considered to have more volatility than bonds or cash equivalents.
Like all investments, stocks carry certain types of risk. As an investor, it’s important to understand what those risks are and know how to anticipate them. However, that is what investing is all about; taking risks, in the hope of making money on your investment, with no guarantee that you will make money.
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