What Is A Stock?

What comes to mind when people think about investing? Often it’s about buying stocks, but what is a stock? It’s either known as a common stock or share. Buying a common stock means you own a percentage of a company. If you own enough stocks, then you’ll become the majority owner of that company.

Being the majority owner means you have more control and influence on the company’s activities from changing executives, management, and other procedures and policies of the company.

Doing this requires millions or billions of dollars, and you must own 51% of all of that company’s stocks that are available for purchase to be a majority owner.

Public companies have up to millions of shares that are trading in the stock market. Most of the stocks are own by large financial institutions rather than individual investors.

Two Ways a Common Stock Makes You Money

Capital Appreciation:

It is when the stock price increases more than what you had purchased for, and you profit the difference between your original purchase and how much it increases at the time you sold it.

Dividend Income:

Companies have the option to give shareholders a percentage of their company’s profits periodically, typically every quarter. Look at a company’s dividend yield to see how much dividends one can get each year based on its relative stock price.

Pricing Common Stock

The pricing of a stock is taken into account many factors. The overall factor is investors’ future expectations of a company. If investors believe the company will grow more, then more shares would be purchased, and the stock price increases.

But if investors believe the company is currently performing poorly, then shares would be sold, and the stock price decreases.

Note this is not the case with every stock as the price can move up and down rapidly based on irrational market trading rather than trading rationally.

Categories of Stocks

Growth Stocks – A company reinvests its earnings back into the business to grow further. This type of stock focuses on capital appreciation for its shareholders. It’s rare for these companies to pay dividends.

Income Stocks – A portion of a company’s earnings are paid to its shareholders. Dividends would be a consistent income, and the stock price tends to remain stable. Most companies pay dividends quarterly.

Value Stocks – These can either be a growth stock or income stock, but the price is lower than most companies. The price-to-earnings or P/E of value stocks are lower than other companies.

You can think of these stocks as “underdogs” as these stocks have fallen out of favor with investors. These stocks have the potential to rebound back and perform better than expected.

Blue-Chip Stocks – Popular established companies that have a history of both growth and dividend payments. Due to their popularity, it may cost more to purchase these shares than stocks that are not a blue-chip company.

Reward & Risks to Common Stocks

Investing in common stocks allows you to make large amounts of money, but there’s a risk that comes with it. Common stock has the potential to either increase or decreases from your original purchase price. The price of a stock can change very quickly, or it can remain stable for long periods.

Stock prices fluctuate as time passes, and you shouldn’t panic when prices decrease. Practice being patient to let your stock grow more over time, but be aware that sometimes you may need to sell your stock to prevent further losses. It’s is up to your discretion when you wish to sell it.

Rights for Owning Common Stock

Owning a common stock gives one the right to vote on electing the board of directors for a company. Typically, the number of votes you can get is how much of that company’s common stocks you own.

As previously mentioned in the beginning, you have ownership rights for owning common stock.

You have the right to transfer stock ownership. It allows you to trade owned stocks in the exchange market. Stocks are a great form of liquidity of being able to convert it into cash when sold very quickly, unlike other types of investments like real estate or ownership interest in private companies. Both of these investments require a certain amount of time to pass before you can sell off your investment.

Depending on the company you invest in, you have the right to dividends. Some companies would use dividend payments as an incentive to invest in their company, while some would focus on increasing their stock price. As a shareholder, you cannot vote on dividends. Only the board of directors can choose to declare dividend payments or not.

As a shareholder, you can inspect the corporate books and records. Examples of corporate records are the annual report, financial statements, board meeting minutes, and other disclosed public documents. Reviewing these documents can help you make informed investment decisions whether you want to buy, hold, or sell those stocks.

Finally, a shareholder has the right to sue the company for wrongful acts.

Preferred Stocks

Another type of stock that is not as well-known is preferred stocks. Investors would buy preferred stocks for stable dividend income. The dividend payment is semi-annually.

Preferred stocks pay out a higher dividend than common stock, but their stock price remains stable. Thus, you lose the opportunity for capital appreciation if you purchase preferred stocks over common stocks.

Where Can You Buy Stocks?

You can buy stocks through most brokerages online by signing up and creating an account. If this is your first time buying a stock with a brokerage, then take the time to learn the ins and outs of investing from that company.

Popular Brokerages:

Commission Fees

Buying stocks and selling stocks can come with fees. Commission fees are issued when you buy or sell your shares in the market. However, this isn’t a much of a concern, as of today, most brokerages are commission-free trading of stocks.

They do this to stay competitive among other brokerages and other investment companies that offer commission-free services.

Take the time to review if there are any commissions before making a trade. You don’t want to lose a percentage of your profits from commissions.

Taxes

Be aware that you will pay taxes when you sell stocks and receiving dividends. You will only be taxed the amount you profited from selling your stock. Your original investment purchase will not be taxed.

How much you will be taxed comes to how long you hold your investment. If you sell your stock within 1 year, then you’ll be taxed more. But if you sell after holding your stock for more than 1 year, then you’ll be taxed less.