What Are Stocks?
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What Are Stocks?
It’s been said that we have become a "shareholder society." Owning stocks is not for the privileged few alone. Nearly everyone with a retirement plan has some stock-focused mutual funds among his or her investments, and the growth of mutual funds and online trading has made participation in the stock market more popular than ever.
Things To Know
- A share of stock represents a share of ownership in a company.
- When you buy shares of stock, you are entitled to a share of its assets and earnings.
- Two common ways to make money with stock are from dividends and by selling it at a higher price than you paid for it.
Stocks are about ownership of companies
A share of stock represents a share of ownership in a company. When you buy shares of stock, you are becoming a part owner in the firm and are entitled to a share of its assets and earnings. In other words, you are buying equity in the company. Companies sell stock to raise funds, often to invest in growing the business.
Ownership confers other rights as well
Depending on the kind of stock you buy, you may also have the right to vote, along with other shareholders, to elect members to the company’s board of directors and decide other key matters. The most important distinction about this kind of company ownership is that stocks are a form of equity that is designed to be traded—bought and sold.
Unlike buying bonds, which represent loans, holding stock represents actual ownership of equity. Another important difference is that the return on common stock is not fixed, but varies with the performance of the company.
Two common ways you can make money on stocks
There are two main ways to make money with stocks. Many stocks pay dividends, which are shares of the company’s profits that shareholders receive as income. You can also make money on fluctuations in the stock’s market value if you can sell it at a higher price than you paid for it.
Because the value of stock depends on so many factors, investing in the stock market often seems risky. However, over time the stock market has historically outperformed other kinds of investments, even with the occasional crash. That is why stocks are such an attractive investment for high-risk day traders and long-term investors planning for a financially secure retirement.
Learn more about the risks of stocks.
