What is a stock?
When you buy a stock you should have an expectation that the company, and hence your stock, will increase its value in the long-term.
So, if a company has issued 1,000 stocks and you own 1 stock, then you basically own 1% of the company. This means that the amount of ownership is determined by the number of stocks you own compared to the total amount of stocks issued by the company.
As a shareholder, you have the right to vote at the company’s general assembly, receive dividends (the company’s profits) if they are distributed, and sell your stocks on to someone else.
KEY TAKEAWAYS
- Companies issue stocks through the stock exchange in order to generate profits for the business
- Stock also represents ownership, meaning you own a piece of the company when you invest in it
- You buy and sell stocks through a stock exchange, which is facilitated through online trading platforms
- Investing in stocks is a good idea if you want to see your money grow and not depreciate in value
How do you buy stocks?
You buy and sell stocks through a stock exchange. A stock exchange is where individual and institutional investors meet to buy and sell stocks. Today, the stock exchanges are digital.
How do you earn money from stocks?
There are primarily two ways that you can earn money on your investments, those are dividends and capital gains.
Dividends
Dividend is a sum of money paid out (normally annually) by a company to its shareholders as a form of profit sharing. This is one way of earning money when investing.
Capital appreciation
Capital appreciation is a rise in an investment’s market value. So it’s actually the difference between the purchase price and the stock’s selling price. Once you sell the stock, the difference between purchase price and selling price is your profit (or loss). This is called capital gains and capital loss.
Why should you invest in stocks?
Well, in short: to make sure your money maintains its value and you get the freedom to live life on your own terms.
Because historically, investing in stocks has been a good idea as the stock market increases its value by 7-10% on an annual basis (…and yes, this includes years with financial crises such as the IT-bubble etc.)
There are many reasons why you should invest in stocks, but most importantly it’s about growing your money. So don’t just let your cash sit and depreciate. You have worked hard for your money – now your money has to work hard for you!
What is the difference between common and preferred stocks?
The main difference between common stocks and preferred stocks is that preferred stocks give no voting rights to shareholders, whilst common stocks do.
What is the difference between stocks and bonds?
So now we know what stocks are. But what distinguishes stocks from bonds?
A bond is a loan investors give to a company or government. It pays investors a fixed return rate for a fixed period of time. Unlike stocks, bonds don’t give any ownership rights. So when buying bonds, you more or less know what you get meaning the risk is much lower – but most often the reward when investing in stocks is higher.