The Basic Elements of the Stock Market
In the simplest terms, a stock represents a small share of ownership in a company or corporation.
If business is thriving and the stock price rise, then the stockholder's shares gain value.
On the contrary, a flailing company will result in a lower stock price, causing the purchaser to lose money.
In a sense, purchasing stock can be considered a gamble, as stockholders are betting that a company will increase in value.
For example, imagine that Derek's Steel (a fictional company) is trading publicly at $10.
00 per share.
A wealthy businessman is confident that the company will see an increase in sales, so he purchases 100 shares at $10 each, which equates to $1000 dollars.
After a year, Derek's Steel has shot up to $20.
00 per share.
Thus, the businessman has doubled his money.
In general, there are two different types of stocks: common stocks and preferred stocks.
Common Stocks: When people say that they have invested in a company, chances are that they are referring to a common stock.
In addition to investing in a company financially, purchasing this type of financial instrument gives shareholders the ability to vote on matters regarding company policy, as well as elect board members.
In the long run, common stocks will yield a higher return than preferred stocks, however they also carry a higher level of risk.
The example presented above represents a common stock.
Preferred stocks: These differ from common stocks in two major ways: (1) Purchasing preferred stocks does not give shareholders the right to vote on company matters, although they still have ownership in the company.
(2) Preferred stock shareholders are guaranteed a fixed dividend, while common stocks carry variable dividends.
In addition, you can also classify these instruments further as either dividend or non-dividend paying stocks.
Dividend paying stocks will continuously show shareholders income regardless of the company's value.
(Generally, brokers will steer clients to high-dividend stocks).
On the other hand, non-dividend paying stocks will show capital gain only when the company's value increases.
These descriptions represent only the rudimentary aspects of the stock market.
Bonds, mutual funds, investing in foreign companies, and high-dividend stocks are a few other investment tactics that are more complex and make the stock market a rather confusing system for those who are not familiar with it.
That being said, anyone looking to try their hand in the stock market should never hesitate to contact an investment consultant to learn more about how the system functions.
If business is thriving and the stock price rise, then the stockholder's shares gain value.
On the contrary, a flailing company will result in a lower stock price, causing the purchaser to lose money.
In a sense, purchasing stock can be considered a gamble, as stockholders are betting that a company will increase in value.
For example, imagine that Derek's Steel (a fictional company) is trading publicly at $10.
00 per share.
A wealthy businessman is confident that the company will see an increase in sales, so he purchases 100 shares at $10 each, which equates to $1000 dollars.
After a year, Derek's Steel has shot up to $20.
00 per share.
Thus, the businessman has doubled his money.
In general, there are two different types of stocks: common stocks and preferred stocks.
Common Stocks: When people say that they have invested in a company, chances are that they are referring to a common stock.
In addition to investing in a company financially, purchasing this type of financial instrument gives shareholders the ability to vote on matters regarding company policy, as well as elect board members.
In the long run, common stocks will yield a higher return than preferred stocks, however they also carry a higher level of risk.
The example presented above represents a common stock.
Preferred stocks: These differ from common stocks in two major ways: (1) Purchasing preferred stocks does not give shareholders the right to vote on company matters, although they still have ownership in the company.
(2) Preferred stock shareholders are guaranteed a fixed dividend, while common stocks carry variable dividends.
In addition, you can also classify these instruments further as either dividend or non-dividend paying stocks.
Dividend paying stocks will continuously show shareholders income regardless of the company's value.
(Generally, brokers will steer clients to high-dividend stocks).
On the other hand, non-dividend paying stocks will show capital gain only when the company's value increases.
These descriptions represent only the rudimentary aspects of the stock market.
Bonds, mutual funds, investing in foreign companies, and high-dividend stocks are a few other investment tactics that are more complex and make the stock market a rather confusing system for those who are not familiar with it.
That being said, anyone looking to try their hand in the stock market should never hesitate to contact an investment consultant to learn more about how the system functions.