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What Are Stocks and How Do They Function?

by Nathan Zachary

Stocks represent a portion of a company’s ownership. Shareholders own a piece of a firm and claim a portion of the company’s profits and assets (and sometimes dividends).

Therefore, if you buy in a firm’s stock, you can expect a return on your money as the company expands and generates more revenue. You could lose some or all of your money if the business fails. (I’ll explain further down.)

What Is a Stock?

Let’s define “stock”: Stocks are company shares that may be bought and sold on stock exchanges. You can acquire shares in any company with a brokerage account.

Main Types of Stock

Mitbbs Stocks come in two varieties: common stock and preferred stock.

It’s probably apparent that common stocks (or “shares”) are the most prevalent type. In addition to a stake in the firm equivalent to their share of the stock’s value, holders of common stocks can vote on significant corporate matters, including the appointment of directors and changes to the company’s organizational structure.

While preferred investors don’t get a say in the company’s management, they get paid before common shareholders do. That’s why shares of this type are a marginally safer investment. Preferred stockholders have a lower chance of losing everything if the company goes bankrupt and has to liquidate its assets to repay investors.

The Trouble with Trading

When stocks were first traded in the 17th and 18th centuries, there wasn’t nearly as much oversight as there is now. Cons and blatant fraud were commonplace in the stock markets. The English South Sea Company was one of the earliest and most infamous financial scandals. The firm, which had sought to make money off the slave trade, was notorious for selling stock to many people with the promise of huge returns.

Consequently, in 1720, the South Sea bubble burst, and the corporation collapsed, devastatingly affecting developing international markets. In England, issuing securities was illegal until 1825, nearly a century.

How Stock Exchanges Fuel Economic Growth

Growth in trade and prosperity in countries occurred directly due to the proliferation of stock markets, which was facilitated by international trade. After all, being listed on the stock exchange allows enterprises access to much-needed funding for growth. Coincidentally, stock markets emerged as a significant supply of funds for traders.

The Philadelphia Stock Exchange was the first in the United States, opening in 1790; the New York Stock Exchange followed two years later in 1792.

How Stocks and the Stock Market Work

When a firm holds an initial public offering (IPO) and sells shares to the public for the first time, it creates a stock. In most cases, stock transactions take place on a centralized exchange such as the New York Stock Exchange (NYSE), the Nasdaq Stock Market (NASDAQ), or the London Stock Exchange (LSE) (there are 60 major stock exchanges worldwide).

Individuals can trade equities listed on a particular exchange by opening a brokerage account. Both the buy and sell prices are displayed on exchanges.

What Are Some Common Stock Terms?

Learn a few keywords if you need the entire concept of stocks taught and unpacked. Although it’s hard to include every phrase used in stock investing, the following is a short list of some of the more important ones:

Dividends

Dividends are distributions made from a corporation’s profits to its stockholders. Each shareholder receives a proportional share of the company’s earnings based on the number of shares of stock they own. Dividends can be paid out in the form of cash (a “cash dividend”) or stock (a “stock dividend”).

Bullish Shares

The term “growth stock” refers to the shares of firms that have shown substantial potential for increasing revenue or earnings, and thus their stock price.

Market capitalization

A company’s market capitalization is calculated by multiplying the current price per share by the total number of outstanding shares. The market capitalization of a company is $300 million if there are 10 million outstanding shares of stock and the stock is selling for $30 a share

The Takeaway

A stock is a fractional share of a company. Common and preferred stocks provide different opportunities and risks.

Stocks, albeit risky, provide more profit prospects than bonds or savings accounts. Despite economic downturns, the stock market has risen for a century.
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FAQ

Difference between Stock and Share

The smallest possible unit of ownership in a company’s shares. The corporation that issues stock shares is generally referred to as “stock.” Thus, you would invest in 100 shares of Company A rather than 100 stocks (implying you owned shares of 100 different companies).

What is shareholder ownership?

If you own shares in a firm, you are considered an owner of that company. Owning 20% of a company’s shares does not give you 20% control of the company.

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