Stocks are equity investments that make you the part-owner of a company. Companies issue stocks to raise money. Here’s a guide to investing in stocks:
Types of stocks
Stocks are mainly of two types—common or preferred. Owning common stocks entitles the stockholder to a proportionate share of the company’s profits or losses. When people talk about stocks, they are generally referring to common stock.
Holders of preferred stocks are given first preference—they are the first to receive dividends (quarterly payments given to the stockholders by the company) and the first to get paid if the company files for bankruptcy. The price of preferred stock doesn’t fluctuate like that of common stock. Owners of preferred stock, however, don’t get any voting rights in the company elections.
Fluctuations in stock prices
The stock market can be compared to an auction. Buyers or sellers may be corporations, individuals, or governments. When there are more sellers than buyers, stock prices reduce. Stock prices go up when the number of buyers is more than the sellers’.
A company’s performance doesn’t directly impact its stock price. It is the investors’ reactions to the performance that makes the difference—if a company is doing well, more people want to purchase its shares, causing the stock prices to increase.
Stock market capitalization
Stock market capitalization (cap) is the sum of total shares outstanding multiplied by the share price. For example, if a company has 1 million outstanding shares valued at $50 each, its market cap would be $50 million.
Market cap allows you to analyze a company’s performance in comparison to other companies in the same industry.
Stock splits—another term you should know if you deal in stocks. A stock split occurs when a company increases its total number of shares by dividing its current ones. The division is usually done in a 2-to-1 ratio. For instance, if you own 100 shares priced at $80 each and a stock split occurs, you would have 200 shares worth $40 each.
A stock split only increases the number of shares, not their value. Companies introduce a stock split when the stock prices are increasing in a way that disadvantages small investors.
You can buy stocks using an investment app, or a brokerage account. Using these platforms allows you to buy, sell, and store your purchased stocks on your smartphone or computer.