What is a stock? The stock market works like an auction house where traders buy and sell shares of stocks. More often than not, stock prices reflect opinions. Opinions of what the company’s value is, what it “might” be worth down the road, etc. Traders who think the company’s outlook looks promising bid the price up. Those who believe it will do poorly bid the price down.
Did you know that The Dutch East India Company was the first reported issuer of common stock? In 1602, the company issued shares to raise needed funds for their operation.
Table of Contents
What Is a Stock?
- In the simplest terms, a stock is a security representing a portion of the ownership of a business. Another term that is frequently used instead of ownership is ‘equity.’ More importantly, a single unit of stock is known as a share, and corporations sell shares to raise operating capital. Stock market classes for beginners can help you understand how to trade.
How Does the Stock Market Work?
To purchase or sell stocks, traders and investors can use one of several stock exchanges in various countries or participate in a private sale. For many investors, these shares form the basis of an investment portfolio.
Day traders buy and sell stocks on the same trading day. Ultimately, the end goal is the same: to make money.
The government usually regulates transactions to protect from fraudulent practices. These investments’ performance is often better than most other types of investments and can be acquired from most stockbrokers who operate online.
However, please be careful if you’re opening a brokerage account in a country with loose or no regulations.
Whichever stock you purchase, you’ll want a broker with a reputation for fast and accurate order execution, low commission costs, and cutting-edge tools.
When I Buy Stock in the Company, Do I Own It?
The short answer is: no. It is essential to understand that those who own stock in a company do not technically “own” the company.
Instead, shareholders may be entitled to a portion of their earnings depending on the type of shares owned. As you may know, if you own stock in dividend-paying companies, some pay a nice quarterly payout.
Why Do People Buy Stocks?
- People buy stocks because they want to make money either short-term or long-term. It’s important to buy low and sell high, which means purchasing stocks on a dip or a reversal. You can trade a stock split, earnings, news, rumors, etc. Know your risk management, strategy, and price target, so you know if you want to buy a stock or wait.
What Happens If I Own Stock in a Company That Goes Bankrupt?
Understanding the difference between owning shares and owning a business is important. As a legal person, a corporation can borrow money, file taxes, and own property, including corporate offices and equipment. Other persons or businesses can also sue a corporation.
Property owned by the corporation is distinct from the shareholder‘s property. This distinction limits the liability of those who own shares and the corporation. Now this distinction comes into play if the corporation declares bankruptcy.
The judge can order the company to sell all its assets, but the personal assets of any shareholders are not at risk. Conversely, if one of the major shareholders goes into bankruptcy, the assets of a corporation cannot be sold to pay off the creditors of this shareholder.
Separation of Control and Ownership
To restate the ownership issue: shareholders own shares issued by the corporate entity, while the corporation owns its assets.
An investor with one-third of a company’s available shares doesn’t own one-third of the business; instead, the shareholder owns 100 percent of a third of the firm’s shares.
Why Traders Like to Own Stocks
- Voting rights
- Making money
- Dividends
Voting Rights
Now that you know what a stock is let’s move on to the benefits of stock ownership. When you own stock in a company, there are certain rights and benefits which come with ownership.
You can attend and vote in meetings of the shareholders. You can receive financial profits that come in the form of dividends if and when dividends are issued and distributed. As the percentage or number of share ownership increases, the voting power also increases. At the same time, this allows the shareholder to control (indirectly) the direction of the firm in question.
The firm’s shareholders’ control is handled through the make-up of the Board of Directors. The Board of Directors has the responsibility for increasing the corporation’s value. Usually, professional officers or managers manage the day-to-day operations of a company. At the same time, when a company’s sold, the transfer of ownership occurs through the transfer of shares.
Making Money
Stock ownership also brings the right to sell shares to another person or company for profit! That’s where the wonderful world of day and swing trading comes in. Traders can make money trading stocks. They can also lose it.
Dividends
For most stockholders, the process of managing a company is not their end goal. The advantage of being a shareholder is in two areas.
Firstly, the shareholder may be entitled to a part of a company’s profit, often as periodic dividends. Owning more shares means more profits from dividends—however, not all corporations issue dividend payments.
Instead, the corporate profits are invested back into the company. Secondly, this increasing value of these corporate retained earnings means that the value of their stock increases.
Two Stock Classifications
As I mentioned above, your rights depend on the type of stock you own. For starters, there are two different stock classifications: Common and preferred.
First, the owners of common stocks can typically exercise voting rights at shareholder’s meetings. Not only can they vote, but common shareholders also have the right to the dividends issued by the firm. Yay, money!!!!!
On the other hand, the other classification of stocks is ‘preferred.’ These shareholders have a higher priority claim on corporate earnings than common shareholders.
Dividends go to preferred stockholders before common stockholders. In the unfortunate scenario, the corporation goes bankrupt, preferred shareholders have priority.
Companies can issue additional shares if they need to raise cash for equipment purchases, expansions, or other operational costs.
But this doesn’t come without consequences. The negative side to such an action is that the existing shareholders’ rights and ownership become diluted (unless they choose to purchase any of the new shares).
Alternatively, corporations can choose to buy back shares. This action would benefit those shareholders who are already on corporate books, as the value of their shares would increase.
Closing Thoughts
You must invest time and effort if you’re serious about learning how the stock market works. By practicing diligently and honing your technique–making a living from day trading is within grasp.
It takes about six months to a year of hard work before you start seeing those consistent profits (which may be minuscule in the first year).
Like life, being consistently profitable in the stock market is not a destination. You don’t become profitable and then get to relax.
