Understanding Investments in Stocks

StocksStocks are fractional pieces of a business that allow an investor to have some ownership of the assets and profits of the company. Buying a stock means owning a piece of the business. Companies issue stocks and make them available for sale to the general public in order to raise money. This is often a more attractive option for growing businesses than attempting to take out a large loan or issue bonds. The amount of stock available is generally related to the estimated value of the company although it can be higher or lower depending on several factors. Modern stocks are purchased electronically through brokers or software connected to exchanges.

The price of stocks will increase or decrease based on the performance of the company or the volume of trading on the market. Companies that perform well and generate profits normally see an increase in stock prices. Companies that perform poorly will see a drop in stock prices. Additionally, investor attitudes could affect the price. If many investors feel a company is about to fail despite profits, then the sale of large amounts of stock could lower the price. This volatility is one of the risks of investing in stocks.

Stocks are investments designed to make money for the stockholders. There are two ways to make money from stocks. The first is through dividends. A dividend is a portion of the total profits of the company over a period of time that is given to stockholders as a reward for investing. The disbursement is based on the amount of stock held in the company. More shares means larger dividend payments. Companies are not required to provide dividend payments. The other way to make money is to wait until the price of the stock increases above the purchase price. The stock can then be sold for a profit. Understanding how long to wait before selling is the core of stock trading.

Stockholders are partial owners of a company. It is important to understand that this ownership has limits. Stockholders are entitled to vote each year to elect the members of the board of directors for the company. Each piece of stock owned entitles the investor to a single vote. Stockholders do not have any capability to manage or direct the operations of the company unless a controlling share is held. This generally means owning a significant percentage of shares in the company. The other part of stock ownership to understand is that stocks provide limited liability. This means stockholders are not responsible for any debts, losses or legal troubles associated with the company beyond the cost of the investment.

Follow Us!

  • Flickr
  • Delicious
  • Facebook
  • Twitter
  • LinkedIn

Sign-up for our newsletter!

Sign-up and receive information about finance sent right to your inbox.