What is a Stock?
A stock represents partial ownership, or equity, in a company. Stocks are also known as equities and shares.
When you buy stock, you are buying partial ownership of a company, including its assets and profits. After the purchase, you become a “shareholder.” If the company is profitable and successful, the stock price usually goes up. On the other hand, if the company is struggling, the stock price usually goes down. Regardless of how well the company is performing, however, stock prices can fluctuate wildly.
The Stock Market
The Stock Market is a place, either physical or virtual, where shares of a company are bought and sold. Stock brokers are members of an exchange. Within the stock market, stock brokers execute trades on an exchange on behalf of clients.
Investing in Stocks
Investing in stocks can be a powerful way to increase your wealth and save for the future. Stocks have generated higher returns than bonds, commodities, or real estate over the last hundred years.
Example: If you had invested just $100 in Amazon’s IPO (AMZN) in 1997, that investment would now be worth approximately $50,000, not adjusted for reinvested dividends.
However, because stock prices also plummet, you can lose money just as quickly as you earned it.
Besides going up and down in value, stocks can also:
- Issue dividends: Payments in cash or stock made by a corporation to its shareholders.
- Split:If a company’s share price gets too high, it may seem unaffordable to smaller investors. Some companies will then split their share into smaller units. They may do a 2-for-1, 10-for-1, or even a 100-for-1 stock split.
For example, if your Coca-Cola stock is worth $100 and the company announces a 2-for-1 split, your $100 share would be divided into two equal shares of $50.
- Give their owners voting rights: Shareholders get one vote for each share of common stock they own. They can use those votes to vote on important company resolutions at the AGM each year.
One Common Rule of Thumb
100 – (your age) = % of your portfolio to keep in stocks
Younger investors can tolerate more volatility, as they can wait for markets to recover after a correction. They should, therefore, hold a higher percentage of stocks than bonds.
As investors approach retirement, they should allocate more to bonds, which will reduce the volatility of their portfolio. Bonds also pay interest, giving investors income during retirement.
In recent years, due to the fact that people are living longer, it has been suggested that this rule of thumb should be adjusted. Allocations of “110-age” and even “120-age” have been suggested.
- Common Stock
- Also known as ordinary stock, give owners voting rights within a corporation. They also give their owners an economic interest in the company’s assets and profits, but in the case of the company being liquidated, common stock holders are only paid out after all creditors have been paid.
- Preferred stock
- Does not carry voting rights, but preferred stocks pay a fixed dividend, and in the case of a liquidation, holders are paid out before common stock holders.
- Direct Ownership: Investors need to open an account with a stock broker to buy and hold stocks.
- Mutual Funds: Investors can invest in mutual funds that own a portfolio of shares and are managed by a professional portfolio manager.
- Exchange-Traded Funds: ETFs are funds that are listed like a share. ETFs hold a basket of shares that tracks an index, such as the Dow Jones Industrial index. Investors need to have an account with a stock broker to buy ETFs.
- The most expensive share of stock in the U.S. is Berkshire Hathaway at over $250,000 a share.
- Stocks on exchanges in Chile and Argentina, however, can cost more than $2 million each!
- All stocks have ticker symbols of between one and four letters. These are the codes by which they are known on exchanges. These are usually abbreviations, such as AAPL for Apple or MSFT for Microsoft. Sometimes, though, they are more creative. Avis Budget’s ticker symbol is CAR, and National Beverage Corp’s is FIZZ.