Thursday, February 26, 2009

What is a stock ?

A stock or a share is a simple investment instrument. In fact it is the most common and easiest to buy. When you hold stocks in a company it simply means that you are part owner of the company. You also have all the rights and responsibilities that come with owning a company.

When you own stocks in a company you have a say in how the company operates - though if the company has issued millions or even billions of shares, your 10 or 100 shares might not make you the most influential shareholder. You also have a right to part of te profit in term of dividend. You get to participate in annual general meetings and vote on different issues related to the company like who sit on the board of directors, what percentage of profit is given as dividend, when to issue more shares, etc. The list of issues where you can vote is endless.

A companies issues stocks so that it can raise capital to run its business, to expand, to pay debt, etc. A company issues stocks on an initial public offering(IPO) where it offers stocks to the public and institutional investors. Later on any offering of share will require approval at an annual general meeting. You may want to be on the look out for IPOs of companies.

A company can issue two types of stocks, namely common or preferred stocks.

Common stock represents a simple share of ownership; if the company were to go bankrupt, it would have no liability to common shareholders, so you would lose your investment.

Preferred shares, on the other hand, get some special advantages, which might include higher dividends, fixed return every year or a larger vote in running the company.

In order to start trading and buying you will have to open an account with a brokerage firm. You will give them orders and they would buy th shares for you. There would be a registry where it will be recorded what stocks you own and it what amount. The dividend will be deposited in that account at the brokerage firm.

Shares are traded on the stock exchange. People that own stocks place them for sale. You will not actually know who will sell the shares to you but you will be the new owner of the shares.

Shares are among the investments instrument that has the most return but they are also the most risky. So be careful when buying shares.

Good luck to all of you new investors.

How to start investing with a small amount of money?
Fees and commissions and how they affect your portfolio.
How to choose a broker?
Stocks have higher return than bonds
How to be rich buying stocks!!
Should i sell my stock and hold cash?
How and when dividends are paid?
what is a stock exchange?
How to choose a broker - part 2?



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