Firstly, what are stocks? A stock, often referred to as equity, is a financial instrument indicating ownership of a portion of the business that issued the security. “Shares” are the individual units of stock, and each share entitles its owner to a proportional share in the assets and profits of the corporation that is proportional to the amount of stock they possess.
The majority of stock transactions take place on stock exchanges, which also serve as the basis of the investment strategies employed by many private investors.
How Do Stocks Work?
Corporations supply stock to help the corporation run better because whoever holds shares of a corporation’s stock also helps fund the corporation.
A shareholder is a title given to an owner of a providing company based on the number of shares that person holds compared to the total number of shares provided.
To explain it better, we will take a corporation that has around 100 shares to give. If a certain individual holds 10 of those shares, that individual is also eligible for 10% of that corporation’s earnings and assets.
A corporation and a shareholder have limited liabilities since the corporation’s property is separated from the shareholder. To explain it better, a shareholder does not own a corporation because they hold shares of that corporation.
In reality, a corporation is legally considered a person, meaning they can file taxes, borrow, buy, or own property, and get sued. This allows a shareholder to not be afraid of legally being forced to sell or lose shares or assets if a corporation goes bankrupt. Likewise, if a corporation goes bankrupt, they have no ability to sell a shareholder’s assets for their own profit.
What Does Shareholder Ownership Mean?
It is wrongly believed that by owning 33% of the shares of a corporation, you also own 33%, or ⅓, of that corporation. In fact, you own 33% of that corporation’s shares, meaning you are a shareholder, and it is known as “separation of ownership and control.”
Owning stock in a corporation allows you to have a say in that corporation’s meetings and also sell those shares to other people. By owning the majority of the shares, your say in a meeting gets more important.
Being a shareholder allows you to receive a portion of that corporation’s earnings. The more shares you hold, the more earnings you are entitled to. This is the basis of the value of the stock.
Comparing Common and Preferred Stock
What are Common Stocks?
The ownership stake in a company is represented by a security known as common stock. Common stock shareholders determine a company’s board of directors and vote on policy. Long-term returns on investments made under this method of equity ownership are often higher than average.
A residual claim to a company’s ongoing and future profits is represented by the company’s common stock. As a consequence of this, shareholders are often referred to as being part owners of a corporation.
Being a part-owner does not mean you are an owner of the physical building or a set of desks or chairs in a corporation, only that you own the residual claim. It is mainly bought on stock exchanges and can be traded between individual shareholders that own the same common stocks.
What are Preferred Stocks?
When it comes to dividends, preferred shareholders are given payment preference over common stockholders. Preferred shares often produce a higher return than common stock and might be distributed on a monthly or quarterly basis.
Preferred stockholders, in contrast to common stockholders, have restricted rights, the majority of which do not include the power to vote. Preferred stock combines the characteristics of equity and debt in that it pays dividends at a predetermined rate but also has the potential for price appreciation like equity does.
Purchasers of preferred shares often come from the institutional sector the vast majority of the time. This is because they have access to a number of tax advantages that are not available to individual investors. These tax advantages are the reason for this.
How To Buy Stocks?
Open an Account
Although having a brokerage account is the most convenient way to buy stocks, you certainly do not need one to do so. If you consider yourself a hands-on investor, an online brokerage account is a great location to get started buying stocks because it gives you access to a wide range of resources and information at your fingertips.
Your preferred online brokerage may also inquire whether or not you are interested in opening a margin account. A brokerage firm will lend you money through a margin account so that you can purchase stocks.
In exchange for some higher charges and a significant increase in risk, this affords experienced investors the opportunity to purchase more shares of stock with the same amount of their own money.
Choose The Stock You’d Like to Buy
Since now there exist a lot of companies and corporations that offer shares in their stock, it has become very difficult to know what to buy and where to invest if you are not an experienced trader.
- Dividend Stocks – These stocks give some of the earnings to shareholders in a form of dividends. The idea behind dividend stocks is to hold on to a steady stream of earnings no matter the price of the stock.
- Value Stocks – The general idea and usage of these stocks is to buy underpriced stocks and hold on to them for a long period of time since the price of these stocks is cheap.
- Growth Stock – These stocks are usually provided by young companies. Their price of the stock could be more expensive in general, but there is a lot of room to grow for these companies, especially in the stock market. This gives a bigger price share in the future.
Choose How Many Shares You Want to Buy
To get your feet wet before diving into the real stock market, you might want to start with paper trading by using a stock market simulator. You can practice buying and selling stocks using “fake money” through a method known as “paper trading.” You can also make a modest initial investment if you are ready to commit actual cash.
Fractional shares are a relatively new offering from online brokers that enables you to buy a portion of a stock rather than the complete share. If you are just starting out in the stock market, you may want to take into consideration the purchase of fractional shares. This translates to the fact that you can purchase expensive equities with a considerably lower initial capital outlay.
A great number of brokerages provide clients with access to a tool that translates dollar quantities to share values. If you already know how much money you want to put into an investment, this may be helpful to you. SoFi Active Investing and Robinhood are just two examples of brokerage firms that provide clients with the option to purchase fractional shares.
(Robinhood interface. Source: Dribbble)
Basic Stock Trading Terms You Should Know
Now that you are ready to open an account and trade, it is still important to get in contact with other traders online. Sometimes, applying to groups on different social media apps with other traders may help you understand the stock market better.
If that is what you want to do, it is best to know some basic stock market and trading terms commonly used in the community and between traders.
Ask
The minimum amount of money that a seller of a share of stock is willing to accept in exchange for a share of that stock is referred to as the “ask” price or an offer.
Equity
“Equity” is the number of a company’s shares that are owned by its shareholders. When you purchase shares of a firm in your capacity as an investor, you are effectively purchasing a proportionate amount of ownership in that business.
The stock market is the venue for the purchase and sale of firm shares, often known as equity, from one investor to another. The term “equity” can also be understood to be equivalent to the word “stock.”
Bid
The largest amount of money that a potential buyer of a stock is willing to pay for a share of that stock is referred to as the buyer’s bid for the share of stock.
In the event that there is more than one buyer for a stock, the bidding process comes to a conclusion when one of the buyers submits a price that the other buyers are either unable or unwilling to match.
Spread
There will never be a situation in which the price that a seller wants for an item is the same as the price that a buyer is willing to pay for that item.
In the stock market, there is a discrepancy between the bid price and the “ask” price, with the bid price usually lower than the “ask” price. The variation between the two prices is referred to as the ask-bid spread or spread, and it is mostly driven by demand and supply.
Exchange
The term “exchange” can refer to either a physical location or an electronic market where a variety of securities are bought and sold. i.e. one of the numerous stock exchanges found around the nation or world where individuals can buy and sell shares of publicly traded companies.
Broker
An investor is required to have a connection to the stock exchange in the form of an intermediary known as a broker in order to engage in stock trading. They do not hold any securities themselves but rather act as agents for investors, buying and selling equities on their behalf in exchange for a fee or commission.
Limit Order
A request to buy or sell a particular stock only at a certain price or higher.
Market Order
A request to acquire or sell a stock as quickly as possible at the best price currently available.
Takeaways
- A stock often referred to as equity, is a financial instrument indicating ownership of a portion of the business that issued the security.
- The majority of stock transactions take place on stock exchanges, which also serve as the basis of the investment strategies employed by many private investors.
- Corporations supply stock to help the corporation run better because whoever holds shares of a corporation’s stock also helps fund the corporation.
- A corporation and a shareholder have limited liabilities since the corporation’s property is separated from the shareholder.
- Owning stock in a corporation allows you to have a say in that corporation’s meetings and also sell those shares to other people.
- Being a shareholder allows you to receive a portion of that corporation’s earnings.
