The word “Stock” appears frequently in news stories, in conversations, or on the web. Other common terms associated with the word “stock” are stock markets, trading, investors, and business growth. Once you learn about stocks and different types of stocks, you will be able to invest in companies and their stocks.
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Here’s the first question we need to answer: What is a stock? What is the secret behind its strong relationship with investors, corporations, and even the economy?”
To understand stocks better, we can use an analogy
Let’s say you have purchased a rollercoaster ticket to ride at a carnival. There is a lot of fluctuation in ticket prices at fairs and carnivals due to factors such as the demand for rides. Keep hold of the $2 rollercoaster ticket you bought earlier. There is always a possibility that moment later, the ticket price increases to $3. At that point, your ticket price will be $3 instead of $2.
A rollercoaster’s ticket price rises further than more and more people demand them, driving the ticket price to say, $5. Now you will profit by $3 if you sell your ticket to someone else at that peak time. However, you decide not to sell it at peak times, instead of holding on to the ticket until late at night since you think you can make more money than. At night, people are no longer buying rollercoaster rides as maybe reviews were not exciting as expected. The price of tickets has dropped to $1. You now lose $1 if you hold on to your rollercoaster tickets until the night.
Similar principles apply to stocks on the stock market. Stocks of a company are compared with tickets, while roller coasters represent a company. The experience of going to a carnival is similar to that of going to the stock exchange, where stocks are traded. Stocks of companies are like tickets at a carnival for each ride.
Stocks: What is the real definition?
Once you know what it is in its general sense, let’s define it properly. Stocks give you fractional ownership of corporations or companies. A company puts its shares on the stock exchange to raise funds and capital. The stock represents the shares of a company.
Most people buy and hold on to stock in hopes of making a profit in the future.
Stock prices will increase if the company is growing and more people demand the stock. Even so, a price increase does not only reflect the performance of a company. It can also be impacted by other factors.
In the same way, the reverse is also true. Over time, prices may decline for various reasons. In the same way, roller coaster tickets drop in price when the demand is lower late at night in the above example. In the same way, poor stock performance might leave you losing money through investment.
What is the meaning of owning a stock?
Does owning stock in a company equate to owning a portion of it?
Before we get into the technical details, let’s recap the carnival-ticket analogy. A rollercoaster ticket does not give you ownership of the entire rollercoaster. It is true that the rollercoaster is not yours, however, the rollercoaster owner does provide you a service by allowing you to ride it. One of the things ticket-holders can do is use their tickets as they wish. This includes holding, selling, or using tickets. In contrast, it is not possible to own a roller coaster or parts of it.
Exactly similar would be the case if someone owned, 20% of a company’s stock. It doesn’t mean you now own 20% of the company. Rather, you are entitled to take 20% of the company’s profits from the 20% share you own. In this sense, you are not the company’s owner, but its shareholder.
Do Stockholders have any other rights?
This distinction is important from a legal perspective as well, since the company’s assets are under the control of the management, while the stockholders are entitled to certain rights as well.
- Shareholders have the right to vote at shareholder meetings.
- Dividends can be received from the company (regardless of their stock type) and shares can be sold to whomever the owner chooses.
- Dividends are paid to shareholders from the company’s profits. Additionally, profits from companies can be reinvested back into the growth of the business rather than being distributed among shareholders.
- By owning shares of a company, one can influence it indirectly.
If you own a significant stake in the company, you can increase your influence indirectly. Also, as a stockholder, you will be in a better position to make decisions. This power means that you can appoint directors to the board, which can have a significant impact on the company’s direction.
Are there different kinds of stocks?
Next, we will explore the types of stocks available. Although there are many types of stock, they can be classified by the following factors;
The level of ownership and rights provided to its shareholders determines what type of stock it is.
The first way is by looking at the industry in which the company is operating, we can categorize a stock. Stock issued by companies that manufacture medication, for example, would be classified as biotech stocks. Another way of evaluating the stock is through adding the total value, which is called the market capitalization of the company. There are three main categories of market cap: small, mid, and large. Finally, stocks differ based on the characteristics of companies, their shares, as well as the economic conditions of the market.