Do you want to own a company but do not have finances for it. Do not worry; investing in Trade FTSE 100 Index
stocks has made it somewhat possible for you. By purchasing stocks of a company, you can at least become a shareholder of certain ownership rights. Buying a company stock is one of the oldest and simplest investments in the business world. Have you made your mind invest in stocks now but wait; first, you need to understand what stocks are and how they work by reading this guide.
What are stocks?
Stock is a monetary investment in a company. Stock means a share in the company’s ownership rights. Stockholders do not own the company; they own shares issued by a company. Investors buy stocks to earn a return profit on their investment. At the same time, companies sell stock to fund a new product, expand existing product lines, business operations, or pay off debt. A unit of stock is called a share. Stocks are also known as equity.
If you own enough stocks, for instance, 5 to 10% of the total shares, you significantly influence how that company runs and on the company’s decision-making.
Return on Investment:
Investors get a return on their investment in stocks in two ways.
• Stock price goes up: if the stock prices appreciate, the investor can sell it in the open market and earn a profit.
• Dividend: they are the payment made to the stockholders out of the company’s profit. Many companies pay dividends every quarter. Some companies do not pay dividends and reinvest earnings into growing the company. Dividends are variable and not guaranteed.
Share Holders have voting power:
Once you buy stocks of a company, you automatically become the owner of a fraction of a corporation. It makes you eligible to vote at shareholders’ meetings. If you own 1 or 10 shares, that means your vote will be less of the total votes and will not have a substantial influence. Still, if you own enough shares, your votes in the meetings can influence the important decisions like who will be on the board of directors or acquiring a new company.
How are stocks bought and sold?
You can buy or sell a stock whenever you want, as long as there is a buyer and a seller at both ends to make a deal. Generally, stocks are trading and buying in the stock exchange. Initially, the company sells its share to stock through a process called an initial public offering IPO. Once the stocks are in the market, the investors can sell and buy them.
But the investors do not perform this trade directly. It is done in the stock market through the representative broker of each investor. Stocks are selling and buying based on the traders’ speculation or expectation of how good or bad the company will do. If the trader thinks that the company‘s profit will rise further, they bid up the stock price. The price of stocks drops if more people are selling the stocks. The stock price will rise high if more people are buying the stocks.
Types of stocks:
There are many types of stocks based on their size, industry, location, technology, services, etc. However, there are two main types of stocks called common stocks and preferred stocks.
If, for the very first time, you want to buy some shares of a company and looking for long-term growth, then common stocks are the best choice. As the name indicates, they are the stocks commonly traded at the stock exchange. When you own common stocks, it gives you the right to vote in the shareholder’s meeting and record your opinion about the company’s strategic decisions. A common stock makes you eligible to earn dividends as well.
The risk associated with common stocks is that common stockholders are the last one who gets the share in the dividend if the company goes bankrupt. Another risk is dividend and stock prices experience more volatility.
Preferred stocks are for those investors, who want to invest for income and not for long term growth. Preferred stockholders get the preferential treatment. The preferred stockholder receives the dividend before the common shareholder. In the case of bankruptcy and liquidation, the dividend is first paid to the preferred shareholder.
The dividend for preferred stocks is generally higher paid and guaranteed. They have no right to vote. Preferred stocks share prices experience less volatility.