Stock is essentially a security that indicates the ownership of a company. Also known as equity, holding shares of a stock enables the owner access to assets, profits, and votes equal to how much of a stock is held. The more stock a party holds of a company, the more they’re entitled to.
Great, but what is a stock?
You can think of a stock as a company’s pie. This pie represents the ownership of this company. It’s broken up into units, known as shares. For each share you own of a company, you own a little slice of the pie. the more shares, the larger the slice.
A company issues (or sells) shares of stock to raise capital to operate or invest in growth. The buyer of these shares then owns a portion of the company. Depending on the type of shares held, this may allow the party access to a portion of the company’s assets and earnings.
Owning the stock of a company is a great way to become an owner of the said company. If there are 1,000,000 shares in the circulation of a particular stock and you buy 10,000, you will now own 1% of the company. A company is not the same as a corporate entity. Owning shares of a corporation has limitations in place due to how they are regulated by law.
This is how companies initiate takeovers or acquisitions. You’ll often see a proposal for a company to purchase another at a set cost per share since the buyer will be offering to take all (or an agreed amount) of the available stock. A company can issue stock at any time, which dilutes the ownership of the company, lowering the price of the stock. It can also initiate a buy-back, which does the opposite.
Voting and dividends
As aforementioned, owning shares of a company may entitle the holding party access to company shareholder meetings where votes can be cast. This also depends largely on the brokerage used and whether it supports providing the shareholder with access to such a facility.
Where things get particularly interesting for shareholders is with dividend payments (I’ve got a guide on what to look for in dividend stocks). A company can choose to pay out a portion of its profits to shareholders in the form of a dividend. This regular payment can be declared and made on an annual, semi-annual, quarterly, or monthly basis.
Dividend investing is a great way to create a passive form of income, but if a company doesn’t pay out a dividend, it likely means the board chooses to instead reinvest the money directly into the company. This is reflected in the stock price. When a dividend payment is made, the stock price falls accordingly. When a company releases its financial report and reinvests its profits, the stock price should increase.
How do you buy shares?
In order to buy and sell shares of a company stock, you need to use the exchange it’s listed on. For instance, Apple (AAPL) is listed on the NASDAQ exchange, so all orders for shares must go through the platform. Most traders will use a brokerage. I’ve rounded up some of the best trading apps for UK investors.
Different types of stock
Not all stocks are the same. The two major types of stock are common and preferred. Common stock is the most common (hence the name) and is likely what you will be trading through your broker and the exchange.
The main difference between the two is common stock comes with voting rights while preferred stocks generally do not. On the flip side, preferred stock owners have priority over assets and earnings compared to common stockholders. They often receive dividends and come first in line in the case of a liquidation.
Companies can have both types of stock available for trading. Volkswagen has common stock (VOW) and preferred stock (VOW3) both listed for trading.
Stocks vs. Bonds
Stocks allow you to gain partial ownership of a company or corporation. Bonds are a loan of money from yourself to the aforementioned party or government. Stocks pay dividends and appreciate over time in value, while bonds usually pay fixed interest over time.