Definition
Stocks are an investment that allows you to own a part of a public company.
Concept and Example of Stocks
Stocks represent ownership in a publicly traded company. When you buy shares of a company, you become a shareholder in that company. For example, if the company has 100,000 shares, and you buy 1,000 of them, you own 1% of the company. Owning stocks allows you to benefit from the company’s growth and grants you shareholder rights. Alternative names for stocks include equities and shares.
Key Points
Stocks represent units of ownership in the company.
The basic ways to make money from stocks are through an increase in their share price and dividend distributions.
Stocks can be categorized by sector, valuation, or value.
How Do Stocks Work?
Companies sell stocks to raise additional funds to grow their business, launch new products, or pay off debt. The first time a company issues its shares to the public is called an “initial public offering” (IPO). After the IPO, shareholders can resell their shares in the stock market, where prices are determined by supply and demand.
The more shares available for sale, the higher the stock price. The more people buy a stock, the higher the stock price. Generally, people buy or sell stocks based on expectations of corporate earnings or profits. If traders believe a company’s earnings are high or will rise further, they drive up the stock price.
One way shareholders generate a return on their investment is by selling their shares at a higher price than what they paid for them. If the company does not perform well and the value of its shares decreases, they could lose part – or even all – of their investment when sold.
Main Types of Stocks
There are two main types of stocks: common stocks and preferred stocks.
Common Stocks
Common stocks are tracked by the Dow Jones Industrial Average and the S&P 500. Their value depends on when they are traded. Owners of common stocks have voting rights on company matters, such as the board of directors, mergers, acquisitions, and takeovers.
However, if a company declares bankruptcy and liquidates its assets, common stockholders are the last to receive any financial compensation, after bondholders and preferred stockholders.
Preferred Stocks
Preferred stocks also represent a share of ownership in the company, but without voting rights. Preferred stockholders know the exact amount they can expect to receive in dividends because their payments are fixed. Preferred stocks can be converted into another type of equity.
Other Types of Stocks
Beyond those basic classifications, there are more ways to categorize stocks.
Equity Industry Sectors
You can also categorize stocks based on the characteristics of the companies that issue them. These different classifications meet the diverse needs of shareholders. Stocks can be grouped by industry sector, including:
– Materials: companies that extract natural resources.
– Diversified: global companies in various industries.
– Consumer goods: companies that provide goods sold at retail to the general public.
– Financial services: banks, insurance, and real estate companies.
– Healthcare: providers of healthcare, health insurance companies, medical equipment suppliers, and pharmaceutical companies.
– Industrial goods: manufacturing companies.
– Services: companies that provide products to consumers.
– Technology: computers and software.
– Utilities: electric, gas, and water companies.
Growth Stocks
Stocks can also be categorized based on their potential and value. Growth stocks are expected to experience rapid growth, but they usually do not pay dividends. Sometimes, companies may not even be profitable, but investors believe that the stock price will rise. These are typically smaller companies that have significant room for growth and expansions to their business model.
Stocks
Value Stocks
Low-value stocks are considered to be companies whose shares are trading at a price lower than their underlying values, such as earnings or other metrics or multiples. The stock price itself is not expected to rise much. Large companies that are not new tend to be overlooked by the market. Smart investors see the prices as invaluable for what the companies offer.
Blue-Chip Stocks
Blue-chip stocks are considered to have decent value and may not grow rapidly, but they have proven to be reliable companies in stable industries over the years. They pay dividends and are considered a safer investment than growth or value stocks. They are often referred to as “income stocks.”
Source: https://www.thebalancemoney.com/what-are-stocks-3306181
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