Whenever you turn on the television, go online or read a newspaper, there is a good chance you will probably run across financial information regarding the trading of stocks. A stock, in the simplest of terms, is a small piece of a company. Once a company goes “public”, it has the ability to issue stock shares to the general public. These stocks commonly trade on a market like the NASDAQ or the New York Stock Exchange. The intention of this article is to provide a detailed account of stock basics so that you have a better understanding.
The Concept of a Stock
The concept of a stock is designed so that a shareholder has a claim to a part of a company’s earnings and assets. To understand stock basics, when you own stock, you are part-owner of a company. Ownership is determined by the number of shares a person owns in relation to the number of total outstanding shares.
Here is an example. Company A has 1000 shares of stock outstanding. You own 100 shares of that particular stock. When it comes to stock basics and ownership, you own and have a claim to 10% of the company’s assets.
The origin of stocks first appeared during the Roman Republic. The state would contract out many of its services to private companies which were similar to modern-day corporations. Shares would be issued by these companies which work in a similar fashion as stocks that trade on the market today. The first joint-stock company was the English East India Company in 1600. Later, it spurred economic growth and more trading markets throughout Europe and the rest of the world.
To know more about stock basics, the application of stocks are used in several fields. However, it is commonly used in private companies as a way to gain additional capital to invest in new projects, free up capital, or reduce their holdings. By selling shares, a company can sell all or part of the company to many part-owners. When you buy a share, you have the right to:
– A share in the ownership of the company
– A fraction of the decision-making power
– Inherited debt and possible litigation
– A fraction of the profits in the form of dividends issued by the company.
In most countries, a board of directors and company managers run the company in the interests of its stockholders. If you own 50% of shares of a particular company, then you own 50% of that company. However, this does not give you the right to use the company’s building, property, or equipment. That is because the company is a legal entity just like a person.
Advantages and Disadvantages of Stocks
Any investment comes with advantages and disadvantages and stock basics are no different. As a stockholder, some advantages include influence in the company’s operations, receiving quarterly dividends from after-tax earnings, as well as several options to trade on major stock exchanges. Of course, there are also disadvantages which include volatility where prices can swing quickly. This creates a risk of loss and heavy competition.
Advantages of Stocks
Here are some of the main benefits of stock investing when learning stock basics:
– There is a potential for very large gains when compared to other types of investments like bonds or CDs. Some investors can double their investment in a year or less.
– Stockholders have limited legal liability since they take no part in the actual running of the company.
– The only potential loss with stock that you buy using cash is the total amount you invest.
– Stock owners benefit in two ways: dividends and capital gains. If the company becomes more valuable, each share of stock will increase in price. When the company earns more profits, it may decide to distribute those profits in the form of dividend payments.
– Stocks can buy and sell very quickly at a fair price compared to other types of investments.
– Historically, stocks offer very high returns when compared to other types of investments.
Disadvantages of Stocks
You should also be aware of disadvantages when making stock investments:
– Your stock portfolio could lose a substantial value within a short period of time because of frequent price swings of several percentage points in a single trading session.
– A stockholder receives money last after employees, creditors, suppliers, and other expenses. Only the money that remains then goes to shareholders.
– Investment decision making can be difficult. Some companies do not share everything there is to know about the company.
– Many people panicked and want to sell when stock prices become erratic. This type of emotional reaction to markets often comes with a loss.
– Stock behavior is often difficult to anticipate because the value often changes for no apparent reason.
– Shareholders do not enjoy the same rights and privileges that owners of privately-held companies do.
– Individual traders often compete against professionals and institutional investors who have more knowledge and time to invest.
2017 can be a promising year for investors when they know stock basics and how to give themselves a slight advantage when investing in stocks. It is important that you understand both the advantages and disadvantages of stocks and use the proper relevant information from good sources to make wise decisions while investing. If you want to share more about your own investment experience or discuss stock basics in more detail, feel free to share your own thoughts and questions.