A stock is a financial asset that represents a fraction of the ownership of a company. When purchasing a company's stock, you own a small piece of this company called a share. The owned company can either be private, or public (listed on stock exchanges)
Owning stock gives you the right to vote in shareholders' meetings of the company (even though it exists non-voting shares) and receive dividends if the company chooses to distribute them. Those voting rights and dividends are proportional to the number of shares you own.
There are a number of ways you can buy stocks, such as through a direct stock purchase plan or through an online broker. When purchasing through an online broker you can place an order to buy stocks, which will be filled when the price of the stock reaches the desired amount.
You can also invest in stocks through a mutual fund or an ETF, a type of investment vehicle that pools money from individual investors in order to invest in multiple stocks with the goal of diversifying risk. This can be a great way to start investing in the stock market while still limiting potential losses.
The most common type of stock is common stock, but there are other, less common types such as preferred stock and restricted stock.
- Common stock: When you buy common stock, you become an owner of the issuing business; you get the right to vote in shareholder meetings and can receive split dividends depending on the performance of the company.
- Preferred stock: Preferred stock is a type of stock that gives investors priority over common stockholders when it comes to receiving dividends, and also provides the right to vote in shareholders' meetings. These stocks have a much more reliable dividend rate than common stock, but their price tends to be higher.
- Restricted stock: This type of stocks offer special tax benefits to their holders. Restricted stocks are usually allocated to employees as a part of their benefits package, and they cannot be sold on the public stock market, except under certain conditions.
First, bonds are a different type of financial instrument than stocks. Stocks represent ownership in a company, while bonds represent debt to the issuing organization; the holder of the stock is an owner, and the holder of the bond is a debtor.
Second, stock holders are generally entitled to voting rights, whereas bondholders are not. Additionally, stock holders are entitled to dividends as long as the corporation generates a profit, while bondholders are generally only guaranteed a fixed rate of return.
Finally, the price of stocks is more variable than the price of bonds, and the scarcity of a given stock affects the price more than scarcity of a bond.
Share buybacks are when a company purchases shares of their own stock in order to reduce the number of shares outstanding. This in turn often leads to a rise in the stock price, as there will now be fewer shares of the company to go around. Share buybacks are usually done to reduce the amount of debt on the balance sheet or simply to return some of the funds to shareholders.
Share buybacks are not without risks; they reduce the amount of liquidity available to investors, and if the price of the stock falls, then the buyback can be viewed as a failed investment. Thus, it's important to do your own research and understand the risks before investing in a stock with the expectation of it being bought back.
A dilution is when a company issues new shares of stock to existing shareholders or to the public, thus reducing the existing shareholders' percentage of ownership in the company. A company can issue new shares for a variety of reasons, such as to fund acquisitions or for adjustments to employee compensation.
Dilution can cause frustration among existing shareholders, as it reduces the value of each stock they hold. It's important to understand the pros and cons of a particular company's dilutions strategy before investing.
Like with any other form of investing, there are risks associated with investing in stocks. These include market risk - when stock prices move up or down in response to fluctuations in the economy - and company-specific risks - when the company experiences losses due to poor performance or bad management.
Additionally, some stocks can come with more risk than others. For instance, penny stocks are stocks that have low trading volume and are usually very volatile, meaning they can be hard to sell quickly if a bad decision is made. It's important to understand the amount of risk associated with a particular stock before investing.