Stock investing tends to yield higher returns than putting your money in a savings account. But like any investment, stock trading has its risks. Starting with the basics, we\u2019ll answer the question \u201cWhat are stocks?\u201d and then walk through the pros and cons of investing in stocks.<\/p>
A stock is a tiny piece of ownership in a company. When you buy a stock, you\u2019re buying a share of that company. If the company does well, your share can become more valuable, and you might even earn money through dividends, which is like a reward companies give to shareholders for owning their stock. But if the company performs poorly, the value of your stock can drop, too.<\/p>
A stock is a small ownership interest in a company. Companies sell stocks to raise money for expansion and development. Say a company is worth $100 million and issues 5 million shares, each share would be worth $20.<\/p>
Every stock sold gives the stockholder (or shareholder) a small controlling interest in the company, although this interest is usually passive. Stockholders aren\u2019t typically involved in the day-to-day management of a business. The exact rights that come with owning stocks vary depending on the type of stock a company issues, but shareholders may be entitled to the following:<\/p>
Like any investment, the value of shares can rise and fall depending on the success and popularity of the company, the strength of the economy, industry-impacting news and other factors.<\/p>
The terms \u201cstocks\u201d and \u201cshares\u201d can be used interchangeably, but there\u2019s actually a subtle difference between the two.<\/p>
No. Company owners may choose to \u201cgo public\u201d and sell stocks to anyone, remain privately owned and sell stocks to a limited ring of investors or remain private and not sell stocks at all. While issuing stock helps companies raise money quickly, it also requires giving up some control to shareholder interests, so not all business owners want to go this route.<\/p>
If 1 person is the only shareholder, they will own 100% of the company. However, many companies choose to sell shares to multiple investors, especially when there are plans to grow.<\/p>
There\u2019s no maximum to how many stocks a company can sell. The amount of stocks varies between companies and may fall between 1 and millions of stocks. The number of stocks isn\u2019t fixed forever either. A company can start off with a relatively small number of stocks owned by its founders, then sell more stocks later to investors.<\/p>
There are two main types of stocks: common stocks and preferred stocks. Common stocks come with voting rights, but preferred stocks don\u2019t. Both common and preferred stockholders could be eligible for dividends, but preferred stockholders will be paid first, so this type of share is generally regarded as less risky.<\/p>
Deferred stocks are less common and only give shareholders the right to dividends after a certain period or when certain conditions have been met, for example, when the company hits a pre-defined goal.<\/p>
Stocks can also be categorized by investment style:<\/p>