What Are Stocks?

Stocks and investments can be confusing for people new to finance and commerce. You may have heard that you can make money and create a passive source of income. While that is true, you would need to be cautious in your approach. People also tend to lose money when trading stocks. In this article, we aim to educate you on stocks, what do they mean, and how exactly people profit from it.

Defining “Stocks”

 By definition, stocks are ownership certificates issued by a given company. In more technical terms, they are a type of investment security, which is also known as equity. So when you purchase a stock, you gain small ownership in that company. You are then known as stockholders. But that doesn’t mean you’ll be allowed to decide on the company’s behalf unless you buy a lot of them and become a majority shareholder.

There are different types of stocks, like common stock, preferred stock, and class stock.

Stocks are issued for two reasons primarily. Those are:

To Raise Capital For Business Expansion

This is by far the most common reason that companies issue stocks. By issuing stocks, they raise money from stockholders who pay a certain amount of money to get the stock. The total amount raised can be utilized for further business expansion and generate more profit. Stocks also don’t come with the risk of bank loans. If the business goes bankrupt, the owners aren’t required to pay the stockholders’ amount. That’s why stocks are considered a risky investment. 

To Build Trust Among Future Investors And Employees

The second reason that a company would issue stock is to build trust. A business requires continuous investment. Stocks purchased by a lot of people are often seen as a sign of trust for potential investors who’d like to invest in the company. This would allow the company to raise more money if possible. Stocks are also issued to employees who become more focused and loyal to the company since the value of stock decides their ultimate paycheck.

Stocks are purchased through a stockbroker, either online or offline.

How Do Stocks Work?

As already mentioned, the primary reason companies issue stocks are to raise money for business expansion. They may also use the money for other initiatives like funding new products or in research and development. But the ultimate aim is to generate profits.

When you purchase a stock, you gain a small percentage of ownership in that company. If you want to buy a stock, you’ll buy it from a company through a broker at a certain price. Let’s say the price of one stock is $10. This depends on multiple factors, including market sentiment and how well the company’s products are doing. You can buy as many stocks are you want, unless the company has set a limit.

Over time, the value of the stock can increase or decrease depending on the factors. If investors show more interest in the company, then the price is likely to increase. If the products start selling at a higher rate, then the rate will increase. If a government policy favors the company, then also the price will increase. The reverse is also true – if things don’t go in favor of the company.

At any point in time, you can wish to sell your stocks to another investor. So, if a stock is priced more than $10, you get to keep the difference and make a profit. For example, if it’s trading $15 at the time you decide to sell, then you make a $5 profit. But if it’s trading lower, then you have to incur a loss.

Therefore, it’s always advised to know when the stock prices are rising and falling and wait for the right time to buy and sell.

What Are Shares?

You may also hear about another term that’s often used in the stock market. And that is “Shares.” But are the two terms different? If so, what’s the difference?

Well, for all intents and purposes, both refer to the same thing. Stock is often interchangeably used for shares. But a minor distinction does exist.

Of the two, the stock is the generic term. It refers to a slice of ownership of a company or multiple companies. On the other hand, shares refer to the ownership of a specific company. So, if you say you own 33 stocks, then it can mean different things. But when referring to shares, you have to say a 33% share of X or Y company.

More specifically, a share is the denomination of a company’s stock at the most granular level. So to divvy up stock, you need to use the word “shares.”

But for general discussion, you can use both shares and stocks without varying in meaning.

What Is The Stock Exchange? 

The final thing you need to know about stocks is the “Stock Exchange.” It is a place, also known as secondary markets, where shares are bought and sold. A company lists its stocks at a stock exchange where buyers purchase them from a stockbroker. But when you’re buying a stock of a company, you’re buying it from an existing shareholder and may wish to sell it to a potential shareholder.

Each country has its stock exchange and can have multiple stock exchanges. In the United States, the stock exchanges are the New York Stock Exchange, Philadelphia Stock Exchange, NASDAQ, Boston Stock Exchange, Miami Stock Exchange, and so on.

 In Europe, you have Euronext, London Stock Exchange, SIX Swiss Exchange, and so on.

With the rise in electronics, telecommunication, and the internet, the exchanges are linked together electronically. You can buy shares of a company listed in NYSE sitting in London or anywhere in the world.

All of the above stock exchanges are regulated by either the government or self-regulated organizations. But there also exist over-the-counter exchanges that are loosely regulated. These are also known as bulletin boards, and the shares listed on them come with higher risks.

Investing In Stocks

To start investing in stocks, you need to sign up with a broker. The broker will provide you a brokerage account. You can purchase the stocks online or call the broker to buy it on your behalf. When you’re ready to sell, you can similarly sell online or ask the broker to sell. Many brokers, especially the online entities, offer zero brokerage fees accounts. That means you are not charged for buying or selling the stocks. They get paid by their clients to transact on their behalf.

Please note that buying stocks doesn’t actually give you the ownership of the assets a company owns. You simply buy the shares that the company issues. The assets are still with the company. If you own preferred stocks, then you’ll be prioritized in case the company and its assets are sold. Common stockholders do not have this luxury.

Conclusion

Stocks inherently come with a lot of risks. Your job is to read those risks and act on them before they materialize. Always read the risk guidelines and disclosure before investing in them. Also, create a diversified stock portfolio where you own stocks of multiple companies rather than a single one.

Frank Gogol

I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.

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