The word “Stock” is often mentioned in the news, in conversation, or on the web. Stock market, trading, investing, and business growth are associated with the term stock. You will be able to invest in companies and their stocks in the future when you learn about stocks and different types of stocks.
Here is our first question: What is a stock? How does it have such a strong relationship with investors, corporations, and even the economy?”
By using an analogy, we can better understand the concept of stocks
Suppose you are at a carnival and have bought a ticket to ride on a rollercoaster. At fairs and carnivals, ticket prices fluctuate rapidly due to factors such as the demand for rides. If you hold on to the $2 rollercoaster ticket, you purchased earlier. Moments later, the price goes up to $3. You now have a $3 ticket.
The ticket price further rises as more and more people demand rollercoasters, driving up the price of the ticket to, say, $5. You will profit by $3 if you sell your ticket to someone else at that peak time. In spite of this, you hold on to the ticket until late at night, hoping to make more money. At night, people are no longer buying rollercoaster rides since they aren’t as exciting as they expected. The price of tickets has dropped to $1. Holding on to your rollercoaster ticket till night means you lost $1.
Stocks on the stock market operate in a similar manner. The shares of a company can be compared with tickets, whereas roller coaster rides represent a company. Carnivals offer similar experiences to stock exchanges, which allow stocks to be traded. The stock of each company is similar to the ticket for each ride at a carnival.
What is stock?
Let’s give it a proper definition now that you know what it is in its general sense. The stock market gives you fractional ownership in companies or corporations. A company puts its shares on the stock exchange to raise funds and capital. Shares of the company are represented by the stock.
It’s common for people to purchase and hold on to shares in hopes of making a profit in the future. If the company is doing well and more people demand the stock, it will increase in price. Nonetheless, an increase in price is not solely due to a company’s performance. A variety of factors can affect its performance as well.
Similarly, the reverse is also true. Price can decline over time for a variety of reasons. The same happens when you hold a roller coaster ticket late at night when the price drops due to lower demand. If your stocks perform poorly, you may lose money through your shares.
How do you own stock?
If I own some stock in a company, is that the equivalent of owning a portion of it?
Here’s a quick recap of the carnival-ticket analogy before we get into the technical details. When you purchase a ticket to ride a rollercoaster, you do not own the whole rollercoaster. In spite of the fact that you don’t own the rollercoaster, there is a service provided by the rollercoaster owner, which is the right to ride it. The one thing a ticket-holder can do is to use the ticket however they wish. They can hold it, sell it, or use it. The roller coaster or parts of it, however, cannot be owned as an asset.
This would be the case if you owned, say, 20% of a company’s stock. This does not imply you now own a 20% stake in the company. Instead, you are eligible to take the 20% chunk of the company’s profits from your owned 20% share. You, therefore, are a shareholder and not an owner of the company.
Stock holders have certain rights
From a legal perspective, this distinction is also important since internal control of the company’s assets is exercised by the management, while stockholders have certain rights.
- They can vote at shareholder meetings.
- Shareholders may accept dividends from the company (regardless of their stock type) and sell their shares to whomever they choose.
- The company divides the profits it earns with its investors as a dividend. Corporate profits can also be invested back into the growth of the company instead of being distributed among shareholders.
- Shareholdings in a company allow one to indirectly influence the company.
However, you can indirectly increase your influence by owning a major stake in the company. You will have more power to make decisions during stockholder meetings if you have a majority stake. For example, if you have this power, you can appoint certain directors as members of the board, and thus affect the company’s focus and mission.
What types of stocks are there?
In the next section, we will examine the types of stocks that are available. Although there are many types of stock, these are categorised by the following factors;
A stock can be classified based on the level of rights and ownership it provides to its shareholders.
Then we can categorize a stock is through the industry in which the company is operating. For example, a company that manufactures medications would have its stock classified as a biotech stock. The third method of judging stocks involves looking at the overall value of all the shares. Which is called the company’s market capitalization. Market cap is further categorized as small-cap, mid-cap, and large-cap stocks.
Lastly, stocks are distinguished according to companies’ characteristics and trends, their shares, as well as the general market’s economy.