Economy 101: Stocks Part 1: Introduction
A share of stock is a share of ownership in a company that can be sold or bought. If you own a share of a company's stock, you are in fact part owner of that company. Ownership of a company's stock typically means that you are given the opportunity to vote on company matters such as the election of board members and that you will share in the company's profits either by an increase in the value of your shares or by the distribution of dividends to share holders.
There are two primary types of stock that you can hold in a company: common stock and preferred stock.
As the name indicates, common stock is the kind of stock held by most investors in a company. Holders of common stock usually have voting rights on company matters such as the election of the company's leadership team. Owners of common stock make a profit when the stock's value increases and can receive dividends based upon the company's performance in the stock market.
Ironically, preferred stock does not typically come with the same voting rights of common stock. What it does offer however is a regular payment of dividends not directly tied to the market. Also, in the event that the company goes out of business and is liquidated, preferred stockholders have priority over common stockholders in the distribution of corporate assets.
Investing in a company through the purchase of its stock is different from savings. While one can earn interest upon the principal (amount of money) placed into savings, the interest on savings accounts is typically very low. Savings is a way to keep money in reserve without concern as to the return on the money saved. This is not the case with stock investment.
Investment in a company's stock implies the potential for earnings based upon the growth of the company. When the company makes money, you do too. The down side of this is that you can also lose money based upon a company's negative performance. In addition to the ownership that the purchase of stock implies, it is this element of risk that separates investment from savings. Investments run the range from conservative (low risk) to aggressive (high risk), and itís important that when you make the decision to invest, you are aware and comfortable with the amount of risk you're taking on.
Buying and Selling Stocks
Stocks are typically bought and sold through a stock broker. This is a person or company who is licensed to make transactions on a stock exchange such as the NASDAQ or the New York Stock Exchange. One can also purchase stock directly from the company, oftentimes through an initial public offering (IPO), wherein a company allows the public purchase of its shares for the first time, or through its investor relations department.
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