Introduction

Stock, also referred to as shares or equity, signifies ownership in a company. When an individual purchases stock, they are essentially buying a small piece of that company. This ownership comes with various rights and benefits, which can vary depending on the type of stock held.

Types of Stock

There are two primary types of stock: common stock and preferred stock.

1. Common Stock:
   • Ownership and Voting Rights: Common stockholders are partial owners of the company and typically have voting rights. These rights allow them to vote on key issues like electing the board of directors and significant corporate policies.
   • Dividends: Common stockholders may receive dividends, which are payments made out of the company’s profits. However, dividends are not guaranteed and can vary.
   • Capital Appreciation: The value of common stock can increase over time, offering the potential for significant capital gains if the stock is sold at a higher price than it was purchased.
2. Preferred Stock:
   • Priority Over Common Stock: Preferred stockholders have a higher claim on assets and earnings than common stockholders. This means they receive dividends before common stockholders and have a higher priority in the event of liquidation.
   • Fixed Dividends: Preferred stocks often come with fixed dividends, providing a more stable income stream.
   • Limited Voting Rights: Preferred stockholders usually do not have voting rights.

How Stocks are Traded

Stocks are bought and sold on stock exchanges, which are organized markets where securities are traded. Major stock exchanges include the New York Stock Exchange (NYSE) and the Nasdaq. Stocks can also be traded over-the-counter (OTC), which involves direct transactions between parties without using an exchange.

Stock Exchanges

• New York Stock Exchange (NYSE): One of the oldest and largest stock exchanges in the world, known for its stringent listing requirements and predominantly large-cap companies.
• Nasdaq: Known for its high-tech stocks and electronic trading system, the Nasdaq features many of the world’s leading technology companies.

Why Companies Issue Stock

Companies issue stock to raise capital for various purposes, such as expanding operations, developing new products, or paying off debt. Issuing stock is a way for companies to obtain the necessary funds without incurring debt. This process, known as equity financing, can be crucial for a company’s growth and development.

How Investors Make Money from Stocks

Investors can earn money from stocks through two main methods:

1. Dividends: Some companies distribute a portion of their profits to shareholders in the form of dividends. These payments can provide a steady income stream.
2. Capital Gains: Investors can buy stocks at a certain price and sell them later at a higher price. The difference between the buying and selling price is the capital gain.

Risks of Investing in Stocks

While investing in stocks can be profitable, it also involves risks:

• Market Risk: Stock prices can fluctuate based on various factors, including economic conditions, political events, and changes in market sentiment.
• Company-Specific Risk: The value of a stock can be affected by the performance and decisions of the specific company, such as management changes, product recalls, or financial instability.
• Liquidity Risk: Some stocks may be difficult to sell quickly without affecting their price, especially in less liquid markets.

Diversification

To mitigate risks, investors often diversify their portfolios. Diversification involves spreading investments across various assets, sectors, and geographical regions to reduce the impact of a poor performance of a single investment on the overall portfolio.