Stocks 101: The Basics of Stock Investing

By Investor / Published on Saturday, 04 Mar 2017 10:57 AM

Over the previous few decades, stocks have captured everyone’s interest. What once was the practice of a few individuals is now being practiced by the majority. Despite its popularity, many people are still unaware of what stocks are and what does it entail. If you are one of those people then keep on reading ahead.

Buying stocks represent your ownership in a company. In other words, you have a claim on the corporation’s assets and earnings. The more stock you buy, the more powerful your status as a shareholder will be. The latter is an individual(s) who holds a company’s stock. Your ownership of the company is represented through a stock certificate. In today’s time, you will not actually see the document since it is kept electronically by your broker. As a shareholder, one of the biggest advantages you face is that of limited liability. Limited lability protects the personal belongings of the owners in situations when the company is not able to pay back to debt holders. So even in the worst case scenario, you will lose only the money you have invested.

Now as a shareholder you have the right to vote for the company’s Board of Directors. If you feel that the current management is inefficient and is not making the best use of your investments, you can simply vote for another management at the Annual General Meeting (AGM). However, you will not have any say in the day-to-day running of the business. Not all shareholders will be given the right to vote the management. Preferred shareholders are the ones who buy preferred stock. As mentioned before, majority of the limited companies do not extend the voting rights to such shareholders. One benefit of this type of stock is that you will be guaranteed a fixed divided forever. Dividend is the return that the company will give you in return of your investment. Another benefit is that in case of liquidation, preferred shareholders will be paid before ordinary shareholders.

Ordinary shareholders are regarded as the true owners in the company. With ordinary stock, you are not guaranteed a fixed divided. Dividend varies from year to year and if financial status of the company is not satisfactory then no dividends will be given to ordinary shareholders. Ordinary shareholders have voting rights so they can vote for who they want to be in the management.

Stocks are traded mostly on exchanges. The latter is a place where buyers and sellers meet to buy stocks. These exchanges can be physical locations, like The New York Stock Exchange, or all the transactions can be done virtually. The purpose of a stock market is to facilitate the buying and selling of stocks between buyers and selling. Stocks can be bought through two ways, which are:

  • Using a brokerage (full-service broker or discount broker)
  • Dividend reinvestment plans (DRIPs) and direct investment plans (DIPs)

Say you have decided to buy stocks but you must also be aware of how stock prices change. Variations in stock prices come as a result of market forces. This means that supply and demand of stock bring about changes in stock prices. Even though it is not a hard and fast rule but if the price of stock is more, it is an indication that the financial status of the company is strong.

This concludes this in-depth tutorial of stocks. You learned about what stocks are, the different terminology associated with stocks, different types of stock, where they are traded, how to buy them and what causes changes in the prices of stocks. Stocks is sure a fun way to make extra money.