Well, a stock is a certificate that shows that you own a small fraction of a corporation. When you buy a stock, you are paying for a small percentage of everything that that company owns; buildings, chairs, computers, etc.
As a part owner of the company, the amount of stock that you own determines the amount of ownership that you have.
For example, if a company has 10,000 shares of stock outstanding and one person owns 100 shares, that person would own and have claim to 1% of the company’s assets. The benefit of owning stock in a corporation is that whenever the corporation profits, you profit as well. Therefore, the risk is that the company could do poorly or even go bankrupt (normally not a good thing for stockholders).
There are two main types of stock: common and preferred…
- Common stock usually entitles the owner to vote at shareholders’ meetings and to receive dividends.
- Preferred stock generally does not have voting rights, but has a higher claim on assets and earnings than the common shares. For example, owners of preferred stock receive dividends before common shareholders and have priority in the event that a company goes bankrupt and is liquidated.
A few notes on stocks:
- Although they are potentially riskier than some other investments, a key benefit is that stocks have no limit to how high they can go in price. The most you can lose is the amount you invested.
- Historically, stocks have outperformed most other investments over the long run.
- You can now purchase most stocks at many online brokers for under $10 a trade and some online brokers offer free online trading.