Stocks: The Basics

Investing in stocks can be rewarding in building wealth without even having to show up at work. We understand that the stock market can be overwhelming, especially for beginners, who have no idea where to begin. So, before you jump on the bandwagon, you should take your time to understand about stocks with these few fundamentals.

 

Finance - StocksImage by Forbes

 

What are Stocks?

Finance - Stocks 2Google Stock Certificate. Image by Kabuken Café.

When you’re buying a stock, you’re buying a company. Stock is a percentage of share in the ownership of a company. As you acquire more stocks, your ownership in the company becomes greater. Shares, equity and stock – they all mean the same thing.

Owning a company’s stock makes you one of the shareholders of the company. By being an owner of a company through stock investments, you get a portion of everything the company owns or makes. You are also entitled to your share of the company’s profits as well as any voting rights attached to the stocks.

 

Type of Stocks

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Image by Wall Street Survivor

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

Drawing from its name, common stock is common because the stock is issued in this form. Over the long run, common stock usually has higher returns than most investments but here’s the catch: it also entails the highest risk. The downside to the common stock is that if a company goes bankrupt and liquidates its assets, the common shareholders will not be paid until the creditors, bondholders and preferred shareholders are paid first.

Preferred stock provides a higher degree of ownership in a company but usually doesn’t come with the same voting rights. Preferred shareholders are guaranteed a fixed dividend, which is a good thing. Another benefit to this is that if liquidation occurs, preferred shareholders are paid off before common shareholders.

 

Buying Stocks

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You can use a brokerage to buy stocks. There are two types of brokerages: full service and discount brokerages.

Full-service brokerages offer you their expertise and advice, and help manage your accounts. But bear in mind, they also come with a heavy price tag.

Discount brokerages might not offer a lot but they are more affordable. The Internet Age has helped increase the number of online discount brokers and with them, anybody who has funds can buy stocks

There is also the dividend reinvestment plan (DRIPs) and direct investment plan (DIPs) offered by individual companies at a minimal cost. These plans allow shareholders to purchase stocks directly from the company. The plans are handy when it comes to investing small amounts of money at regular intervals.

 

By Chris Tan

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