What are stocks?
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You can buy stocks as a way of potentially making most from your investments. When you purchase stocks, you’re basically purchasing shares of a company, which comes with benefits beyond potential profits, such as the right to vote on major company decisions. On this page, you’ll learn what stocks are, the different types and how they differ from bonds, which may help you decide if investing in stocks is right for you.
A stock is a type of security that represents shares, which in turn serves as your claim of ownership in the company
Companies sell their shares on the stock market to raise money that can be used for business growth and development
Supply and demand determine the value or price of a company share in the stock market
What is the definition of a stock?
Stocks, by definition, are securities that represent shares of ownership within a company. Companies usually sell shares of stocks if they want to raise money to grow or develop their business.
From an investor’s point of view, purchasing stocks could give you a way to grow your wealth while beating inflation, depending on the performance of the company you purchase stocks in.
What are the different types of stocks?
There are two main types of stocks, common and preferred. Common stocks are traded on the stock exchange and give investors voting rights in the company they belong to. Preferred stock pays out dividends more quickly, but does not grant you voting rights.
Other types of stock are categorised according to the characteristics of a company or industry sector, and include:
- Basic materials: Companies using natural resources
- Conglomerates: Global companies that may cover different industries
- Consumer goods: Companies providing retail goods to the public
- Financial: Banks, insurance providers and real estate companies
- Healthcare: Healthcare providers, health insurance, medical equipment suppliers and companies that sell medicines
- Industrial goods: Companies manufacturing products or goods
- Technology: Companies selling computers, software and telecommunication products
- Utilities: Companies providing electricity, water and gas
How do stocks work?
Stocks work by giving you a share of a company and inviting you to directly make choices on your investment in line with the company’s performance. Stocks rise or fall in value depending on how well (or not) the company is doing. Stock exchanges can be made when publicly listed companies are bought and sold. When you purchase stocks there are benefits beyond potential profits, such as the right to vote on major company decisions.
Companies typically sell their stocks to generate capital, which they use to grow or develop their business. When public companies sell stock for the first time, it’s called an initial public offering (IPO). After you purchase shares by IPO, you can then choose to resell them on the stock market.
Will I make a profit with stocks?
Supply and demand drives the price of shares, which usually means that the more people who’re selling the same type of stocks, the lower the price. Conversely, the more people buying the stock, the higher the price.
You’ll make a profit if the company you’ve bought stocks in grows, as this growth typically leads to an increase in the price of the stock. You can then choose to sell your stock for a profit. However, there’s a risk involved, as if the company doesn’t perform well, it can lead to the share price dropping or totally losing its value.
Another way you may profit from owning stocks is by earning dividends. Dividends are usually paid quarterly and on a per-share basis from the company’s earnings.
What are the pros and cons of buying stocks?
Pros | Cons |
Purchasing stocks potentially allows you to earn strong returns if you invest in the long-term. | Returns are not guaranteed, and you could lose some of the value of your investment, or your total investment if the company you own shares fails. |
It’s not too hard to get into stocks, as long as you know how the stock market works and you’re good at analysing data. | You’ll need to invest a lot of time if you purchase stocks, because the most successful investments are typically long-term, rather than earning quick profits. |
There are plenty of stocks to choose from, which means if there’s more than one company you want to invest in, you can diversify your portfolio. | The stock market is volatile, which means you can never predict how well your investments will perform. |
You don’t need a huge lump sum to start investing in stocks. | If you choose to invest in one individual company, there’s a chance you might lose all the value of your investment because you don’t have other stocks to make up for the loss. |
It’s possible to stay ahead of inflation, depending on your investment strategy. |
What should I consider when buying stocks?
Before investing in the stock market, consider studying a company’s growth trends. It’s important to understand how well a company has performed before committing to an investment.
You should also check how the company pays dividends to its investors. While earning high dividends might sound good, a spike in dividend pay-outs could mean that a company is desperate for investors.
Finally, check how stable the company is over the long term. Since the stock market can be volatile, you can’t predict the performance of a company based on the stock market’s graphs over one year alone. You could look back at least 10 years on a company’s performance to predict if the company will still perform well in five to 10 years.
What’s the difference between stocks and bonds?
Bonds represent a company or government debt, while stocks are stakes of ownership in a company. When a company, government or other entity issues a bond, it means they are issuing debt with an agreement to pay interest against the money you’re effectively “lending” them. They typically pay out interest annually to investors, while slowly repaying their debt. For this reason, bonds are often considered a safer type of investment for short-term investors.
The method of selling stocks and bonds is also different. Stocks are sold internationally through different stock exchanges such as the New York Stock Exchange in the US and the London Stock Exchange in the UK. Bonds are not sold in exchanges but usually via a traditional brokerage.
Is there a safer way to grow your money?
If you prefer a risk-free way of growing your money, deposit protected savings accounts, such as fixed rate bonds, notice accounts or easy access savings accounts might be right for you. These savings accounts typically allow you to grow your money without risking your capital.