Stocks Defined

What Is a Stock?

A stock, also known as a share, represents a unit of ownership in a company. When you purchase a stock, you are buying a small piece of the company and are entitled to a portion of its profits and assets. The price of a stock fluctuates based on supply and demand in the stock market. As the company earns more profits or becomes more valuable, the stock price may increase, while if the company struggles financially, the stock price may decrease.

A stock, also known as a share, represents a unit of ownership in a company.

Why Do Companies Issue Stocks?

Companies issue stocks as a way to raise capital for their business. By selling ownership shares to the public, the company can raise money that can be used for a variety of purposes, such as expanding the business, developing new products, or paying off debt. Additionally, issuing stocks can also be a way for a company to gain more visibility and attract more investors, which can be beneficial for the company in the long term.

There are two types of stocks, common stock and preferred stock. Common stock holders have the right to vote on the company's board of directors and major corporate actions, while preferred stock holders do not have voting rights but have priority in the payment of dividends and the liquidation of assets.

Companies issue stocks as a way to raise capital for their business.

Two Main Types of Stock

There are two main types of stocks: common stock and preferred stock.

Common Stock

This is the most common type of stock and represents ownership in a company. When you purchase a common stock, you become a shareholder and are entitled to a portion of the company's profits and assets. You also have the right to vote on the company's board of directors and major corporate actions. The value of common stock can fluctuate based on the company's performance and the overall state of the stock market.

Preferred Stock

Preferred stock represents a type of ownership in a company, but it typically has more rights and privileges than common stock. Unlike common stock holders, preferred stock holders do not have voting rights, but they have priority in the payment of dividends and the liquidation of assets. Preferred stock also tends to be less risky than common stock, but it also generally provides a lower return.

There are also other types of stocks such as the ones with different voting rights, like Class A and Class B shares, and some stocks that pay dividends that are cumulative or non-cumulative, and stocks with different redemption rights.

Additionally, there are also various financial products such as options, futures, or ETFs that track the performance of a stock or a basket of stocks.

How Do You Buy Stocks?

There are several ways to buy stocks, including:

Online Brokerage

One of the most popular ways to buy stocks is through an online brokerage. There are many reputable online brokerages available such as TD Ameritrade, E-Trade, and Charles Schwab. To open an account, you will need to provide personal information and may need to fund the account with cash or securities. Once your account is set up, you can buy and sell stocks online through the brokerage's trading platform.

Full-Service Brokerage

A full-service brokerage offers more personalized service than an online brokerage. They can help you with investment decisions and provide you with research and analysis. The downside of using a full-service brokerage is that they typically charge higher fees than online brokerages.

Investment Advisor or Financial Planner

An investment advisor or financial planner can help you develop a long-term investment strategy and can provide you with advice on which stocks to buy. They typically charge a fee for their services, but they can be useful for those who are new to investing or who want more guidance.

Stock Purchase Plan

Some companies offer stock purchase plans that allow investors to buy shares directly from the company. This can be a good option if you want to buy stock in a specific company that you are familiar with.

Reasons to Invest in Stocks

There are several reasons why someone might choose to own stocks, including:

Potential for Growth

Stocks have the potential for significant growth over the long term. Over the last century, the stock market has returned an average of around 10% per year, which is much higher than the return on bonds or savings accounts.

Diversification

Owning stocks can help diversify your investment portfolio, which can reduce risk. By spreading your investments across different sectors and industries, you can reduce the impact of any one stock or market downturn.

Income

Stocks can also provide a source of income through dividends. Dividends are payments made to shareholders out of a company's profits. Some companies pay dividends on a regular basis, while others only pay them occasionally.

Liquidity

Stocks are considered to be relatively liquid assets, which means they can be easily bought and sold. This allows you to access your money quickly if you need it.

Potential to Beat Inflation

Over the long-term, stocks have the potential to beat inflation. Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. As inflation rises, the value of cash decreases, but the value of stocks can increase, helping to preserve the purchasing power of your savings.

Famous Stock Investors

There are many famous stock investors throughout history, but some of the most well-known include:

1. Warren Buffet

Often considered the most successful investor of all time, Warren Buffett is the chairman and CEO of Berkshire Hathaway. He is known for his value investing strategy, which involves finding undervalued companies and holding onto them for the long term.

2. Benjamin Graham

Often referred to as the "father of value investing," Benjamin Graham is considered one of the most influential investors of all time. He wrote several books on investing, including "The Intelligent Investor," which is still widely read today.

3. Ray Dalio

Ray Dalio is an American billionaire investor, hedge fund manager and philanthropist. He is the founder of Bridgewater Associates, the largest hedge fund in the world by assets under management. He is known for his idea of "principles" which is a set of ideas and frameworks that aims to help individuals and organizations make better decisions and achieve their goals.

4. George Soros

George Soros is a billionaire hedge fund manager and philanthropist. He is known for his ability to make large, successful trades, such as his famous bet against the British pound in 1992, which earned him over $1 billion in profit.

What Do Good Investors Look for in Stocks?

Good investors typically look for stocks that have strong fundamentals, such as a solid financial track record, a strong management team, and a clear growth strategy. They also look for stocks that are undervalued by the market, as well as those that pay dividends. Additionally, they research the industry and the company's competitors, and they also consider macroeconomic factors that may affect the stock's performance. It's important to diversify the portfolio and not to put all the eggs in one basket. Long-term investments are also beneficial.

Good investors typically look for stocks that have strong fundamentals, such as a solid financial track record, a strong management team, and a clear growth strategy.

How Does Inflation Affect the Price of Stocks?

Inflation can affect the price of stocks in a few ways. Firstly, if inflation rises faster than a company's revenue and earnings, it can decrease the value of the company's future cash flows, which can lead to a decrease in the stock price. Secondly, high inflation can lead to higher interest rates, which can make borrowing more expensive for companies and decrease their profitability, leading to a decrease in stock prices. However, in some cases, companies that are able to pass on higher costs to consumers through price increases can see an increase in their profits and stock prices during periods of inflation. Additionally, if the stock market anticipates inflation to increase, it could lead to an overall increase in stock prices in anticipation of future profits.

Inflation generally has a negative effect on stock prices.

How Do Interest Affect the Price of Stocks?

Interest rates can affect the price of stocks in a few ways. When interest rates are low, it can make borrowing cheaper for companies and consumers, which can lead to increased spending and economic growth. This can be beneficial for stocks, as it can lead to increased demand for goods and services, and higher profits for companies. However, when interest rates are high, it can make borrowing more expensive and decrease demand for goods and services, which can lead to lower profits for companies and a decrease in stock prices.

Additionally, high interest rates can also make bonds and other fixed-income investments more attractive to investors, which can lead to a decrease in demand for stocks and a decrease in stock prices. Also, companies with a lot of debt may find it harder to service their debt when interest rates rise and that can decrease their profitability, leading to a decrease in stock prices.

It's important to note that the relationship between interest rates and stock prices can be complex and can depend on a variety of factors. It can also be affected by other macroeconomic factors such as inflation, economic growth, and government policies.