Buying the company stock is one of the oldest and simplest investments in the business world. In short, you are making an investment in a company, if that company performs well, the demand for their stock will go up so too will the stock price and you can make money by selling the stock or collecting benefits like dividends. Anyone can buy a stock that makes it accessible even for the most unskillful investors to make a fortune. In order to understand how investing in stocks work, it is impertinent to be well versed with the various aspect and terms of the investment world.
In order to understand what stocks are and how do you make money with them let’s break it all down.
What are stocks and how investing in stock works?
Stocks are effectively shares of ownership of the company, If you own enough stock let’s say five to ten percent of the company, you would have a significant amount of influence on how that company runs. However, most people just own one to ten shares of a company or more or less, you still have an influence but your vote on critical decisions will be less of the total votes so it does not matter as much. Most stocks sold on the open market for individual companies give you the right to vote in shareholder’s meetings.
This means you can decide who should be on the company’s board, shall receive dividends, which company it should acquire, and so on.
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Why and how stocks are bought and sold?
Stocks are bought and sold simply to make money or one can say in order to liquidate their return on investment. One can buy and sell stocks whenever they want as long as there is a buyer and seller willing to take you on the other side of the deal. Most of the time such transactions take place in the secondary market that means the buyer does not buy from companies but from another shareholder.
Issuing shares helps the company to raise capital from the market without having to take a loan. The company initially raises capital by issuing shares through an initial public offering. There are a couple of ways by which owners of stocks earn a handsome return on their investment, one of the ways is called stock appreciation or in other words, people are willing to buy stocks for more money than you bought them for if the company makes great decisions and turns a profit more and more then more people would want to own such stock to make money with them.
This increase in demand drives the price up, assuming the total number of stocks remains constant. This whole scenario is the function of demand and supply, example suppose that you would want to sell an antique item but you have one bidder then most probably your painting would be sold out for cheap but if you have scores of bidders then this would be be increasing its price exponentially.
Stocks can appreciate for any reason because their price is tied to a number of factors some in control of a company and some not. Since stocks are sold on an open market through an exchange their price is more of a reflection of buyer sentiment or how good or bad people think about what the company will do.
Stocks of companies that lose millions of dollars each year can go up in price if the market thinks that they will be more and more successful very soon.
The second way that you can make money by owning stocks is through something called dividends. Dividends are an appropriation of profit that a company does to pay shareholders their due for investing in their stocks. This way company persuades its stockholders to hold on to the stocks for a longer period of time.
Types of stocks
There are different types of stocks that give you different rights or perks.
Common stocks are generally bought and sold in the open market. Such types of stocks give voting rights in crucible matters of a company and dividend rights to its owner.
The main difference between preferred stocks and common stocks is that the owner of preferred stocks as the name suggests has the preferential right over dividend and during winding up of the company.
Though there are other types of stocks as well it is little beyond the scope of what any beginner or even experienced run-of-the-mill retail investor would need to know.
There are other forms of stock that you can buy on the market that don’t represent just one company but rather represent a bunch of companies these are called exchange-traded funds or ETFs they’re essentially a bunch of companies stocks lumped into one stock and you could buy something, for example, a technology ETF meaning that you invested in a bunch of technology companies without having to own each one of the stocks individually this spreads out your risk and provides you more stable growth but it also gives you good exposure to the market as a whole.
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Owning stocks just means that you hope that the company will do well so you can sell your stock for more money than you bought it for. The price of a stock of a company fluctuates all the time so when you are buying or selling any given stock you ought to weigh your investment strategy, are you hoping to sell it within a month or want to hold it back for years. Each strategy presents different levels of risk and returns.