Are you thinking about adding your first stock to your nest egg? Have you been saving for some time and are ready to start putting your money to work? Learn the basics about stocks and how they work.
What Are Common Stocks?
A stock is a certificate indicating ownership of a company. As a shareholder, you are a part-owner of the company and are entitled to share its profits (or losses).
Stocks can be divided into two categories: common stocks and preferred stocks. Common stocks, like the one mentioned in this press release, are the most common type and give shareholders voting rights on important matters like corporate policy and executive compensation. Preferred stocks typically don’t have voting rights, but they offer a higher dividend payout than common stocks.
However, in liquidation, preferred stock shareholders, creditors, and owners of convertible debt get priority over common stockholders.
Stocks are traded on exchanges like the New York Stock Exchange (NYSE) and the NASDAQ. When you buy or sell a stock, your order is processed through one of these exchanges.
The prices of stocks fluctuate constantly based on supply and demand, so it’s crucial to stay up to date with market news if you want to make intelligent investment decisions.
How Do They Work?
Stocks constantly trade on stock exchanges, and the price of a particular stock fluctuates based on demand.
Individual stock prices fluctuate based on corporate earnings and news. The overall state of the U.S. economy affects all stocks.
Expected earnings drive a stock’s demand. Investors will bid up a stock price if they believe profitability will rise for a company according to the price-to-earnings ratio.
Even if earnings aren’t in place yet, expected revenue growth impacts price. This can happen to a company with a lot of potential.
Companies are usually privately held before their IPOs. A public offering allows these companies to grow by generating capital. A company’s initial public offering is when its first shares are issued.
What Are the Benefits of Owning Common Stocks?
The common stockholders are part-owners who have some influence over company operations. For instance, they elect directors and approve mergers and acquisitions and audit reports.
A company’s share price usually rises when it meets or beats earnings expectations. Common shareholders of some companies receive quarterly dividends from after-tax profits.
Most mid-cap and large-cap stocks trade in large volumes meaning that bid-ask spreads are narrow and trade execution occurs quickly.
What Are the Risks of Owning Common Stocks?
Price can swing by several percentage points during a single trading session on the stock market.
In a short period, the value of your portfolio could plummet. It could result in margin calls and forced liquidations of stocks at significant losses if you trade on margin.
Corporations are not obligated to distribute funds to their common shareholders, who are the last party to be compensated in bankruptcy. Investing in thinly traded stocks can lead to investors locking in losses, especially in fast-moving markets.
Conclusion
Common stocks are investment vehicles that signify ownership in a company. While stocks are volatile and susceptible to risks, they are also an opportunity for long-term investors to realize significant gains over time.
If you stick to blue-chip stocks that trade at reasonable valuations and can handle market fluctuations, you should enjoy healthy returns over time.
But any investment has risks, so what is right for you? Well, that depends on your goals, time horizon, and risk tolerance.
