Stocks - Equities

What is a Stock?

Stocks, sometime called equities, represent ownership rights in a corporation. When you invest in a publicly traded company, you get a stock certificate that indicates how many shares of the company you own, and serves as your proof of ownership. Over the short-term, investing in the stock market can pose quite a risk. Over the long-term, however, stocks have earned higher and more consistent positive returns than any other financial investment.

The stock market allows investors to purchase equity interest in companies in the form of stock shares, enabling them to share in a company’s profits. For companies, the stock market offers capital for growth through the sale of stock shares without incurring debt. Stock shares are most commonly traded on large, regulated exchanges, such as the New York Stock Exchange or Nasdaq.

There are two different types of return that stocks can yield:

Capital Gains

Most investors buy and hold stocks for long-term capital growth. If you sell your stock when the market price of the stock is higher than the principal amount you invested in it, you will realize a capital gain. Keep in mind, you’ll typically experience capital gains tax if you pocket your capital gain.

Dividend Income

When a company experiences profit, they will often share it with their owners in the form of dividend payments. A dividend is a declared amount of money, decided by the Board of Directors, which is paid to owners for each share owned. The more shares you own, the more dividend income you’ll receive if a dividend payment is declared. In this way, stock ownership can also serve current income purposes. Dividends are usually paid quarterly or annually, and the dividend amount may vary per period. If the company is not doing well, they may not declare a dividend at all.

There are two primary types of stock that companies issue: common stock and preferred stock. They both constitute an equity interest in a company.

Common stock is most commonly issued by companies and traded on exchanges. When a stock price quote is given, it refers to the share price of the company’s common stock.

Common stock ownership usually confers the opportunity to exercise voting rights regarding a company’s board of directors and other important company decisions.

Preferred stock does not typically convey voting rights. However, preferred stock usually comes with guaranteed payment at regular intervals of larger dividends than common stockholders receive. Dividends are not guaranteed for common stockholders. The equity interest of preferred stockholders takes precedence over the interest of common stockholders in the event of the company’s liquidation. Preferred stock shares are sometimes convertible into common stock shares under certain conditions.

Common stock prices fluctuate in line with a company’s profitability and earnings. Preferred stock prices are not generally subject to nearly as much fluctuation in price. Common stock ownership offers greater potential for capital appreciation, but also comes with a higher level of risk and potential for loss.

Risk

When you invest in stocks, you expose yourself to an element of risk. In fact, stocks are considered significantly riskier than many other types of investment vehicles. With stock, the value of your shares directly responds to the company’s performance – if the company is successful, your investment will typically increase in value, if the company fails, the value of your shares may fall beneath the amount of your principal investment. Additionally, domestic and international economic and political conditions can greatly influence the volatility of the stock market. Because of the daily fluctuation in stock value, investors usually buy and hold stock for its long-term growth potential rather than for any short-term goals.