Introduction to Stocks
- Stocks, also known as equities, are securities that represent ownership in a corporation.
- When an individual buys stocks, they become a shareholder and are entitled to a portion of the company’s profits and assets, as well as the right to vote on certain company decisions.
- Stocks can be bought and sold on stock exchanges, such as the NYSE and NASDAQ.
Types of stocks
- Common stocks are the most common type of stock in the market.
- They represent ownership in a corporation and grant the shareholder a portion of the company’s profits and assets, as well as the right to vote on certain company decisions.
Ownership in a Corporation
- When an individual buys common stock, they become a shareholder and own a small portion of the company.
- As a shareholder, the individual is entitled to a portion of the company’s profits, which are paid out in the form of dividends.
- The amount of dividends paid to the shareholder depends on the number of shares they own and the profitability of the company.
- Common stockholders have the right to vote on certain company decisions, such as the election of directors and the approval of major corporate transactions.
- This gives common shareholders a say in the direction of the company and the ability to influence important decisions.
Claim on Assets and Earnings
- In the event of bankruptcy, common shareholders have a claim on the company’s assets and earnings, but they are last in line after debt holders and preferred stockholders.
- This means that common shareholders may not receive a full return on their investment in the event of bankruptcy.
Risks and Rewards
- Investing in common stocks can be risky, as the value of the stock can fluctuate based on changes in the company’s financial performance and the overall market conditions.
- However, common stocks have the potential to generate significant returns over the long term, particularly for companies that experience growth and success.
- It is important for investors to consider both the risks and rewards associated with common stocks before making any investment decisions.
- Preferred stocks are a type of stock that represents partial ownership in a corporation.
- They are different from common stocks in terms of the dividends and voting rights they provide to shareholders.
- Preferred stockholders are entitled to a fixed dividend, which is paid before dividends are paid to common stockholders.
- The fixed dividend is usually higher than the dividend paid to common stockholders, making preferred stocks a more reliable source of income for investors.
- Preferred stockholders do not typically have voting rights, which means they do not have a say in the direction of the company or the ability to influence important decisions.
Claim on Assets and Earnings
- In the event of bankruptcy, preferred stockholders have a higher claim on the company’s assets and earnings than common stockholders.
- This means that preferred stockholders are more likely to receive a return on their investment in the event of bankruptcy.
Risks and Rewards
- Investing in preferred stocks is generally considered less risky than investing in common stocks, as the fixed dividends provide a stable source of income.
- However, preferred stocks may not have the potential for significant growth that common stocks offer, as the dividends are fixed and do not increase with the growth of the company.
Difference from Common Stocks
- The main difference between preferred stocks and common stocks is the type of dividends and voting rights they offer to shareholders.
- Preferred stocks have a fixed dividend and no voting rights, while common stocks have a variable dividend and the right to vote on certain company decisions.
- Preferred stocks are generally considered less risky than common stocks, but they may not offer the same potential for growth.
- Penny stocks are low-priced stocks that trade for less than $5 per share.
- Penny stocks are often issued by small, emerging companies with limited financial resources and limited trading liquidity.
- Due to their low price, penny stocks are considered to be riskier investments, as they are subject to greater price volatility and market manipulation.
- Blue-chip stocks are stocks of well-established, financially stable companies with a long track record of steady growth and performance.
- Companies that are often considered blue-chip include household names such as Coca-Cola, IBM, and Johnson & Johnson.
- Blue-chip stocks are considered to be less risky investments, as they are backed by strong financials, steady earnings, and a proven track record.
- Blue-chip stocks are often used as a source of stable returns for investors who are looking for low-risk investments.