Such confusing jargon is the result of decades of market exclusivity. Even though technology has pried open the doors to the stock market, a language barrier still prevents newcomers from fully integrating.
Stocks and shares can be used interchangeably but they have one distinct difference. Stock is a general term for all ownership certificates, while the word share is used to indicate an ownership certificate for a specific corporation.
For example:Billy owns 200 stocks. To be specific, he has 100 shares in Apple and 100 shares in Microsoft.
Now that’s cleared up, it’s time to figure out what it means to own stocks. There are two main reasons to buy a stock. The first is called investment. Purchasing shares in a company for investment purposes means that you want to see the company grow and succeed. It is a method of infusing a company with capital in the hopes that it will develop and expand, which in turn increases the value of your shares.
Investment requires the trader to hold on to their shares for a long period of time which means it’s not a method for everyone. Those who want short term gains, purchase a stock for speculative purposes. Speculation is exactly what the name suggests; a trader speculates whether or not the stock will rise in value and bases his/her purchases on said speculation. A speculator sells his/her shares when the price increases, regardless of its possible effect on the company.
Perks of being a Shareholder
Shares have other purposes aside from being traded for profit. Owning shares in a company gives you the title of shareholder, and this title comes with its own perks and risks. The perks and risks of being a shareholder depend on the type of stock that you have bought.
When traders talk about stocks, they are usually referring to common stocks as these are the most frequently traded type of stock. Owning common stocks usually provide the shareholder the authority to vote on board member elections, allowing them a degree of control over the company.
Aside from voting rights, some common stocks yield a portion of the company’s profits to the shareholder. This return of investment is called a dividend yield. The dividend yield of common stock fluctuates depending on the company’s profits, making this type of stock pretty risky, especially when holding shares in companies that don’t have an established performance record.
While common stocks have high dividend yields, common shareholders suffer the downside of being the lowest in terms of priority, should the company go bankrupt. In case of a bankruptcy, the company pays creditors, bondholders, and preferred shareholders first before returning the investment of common shareholders. Since a bankrupt company doesn’t have much in ways of assets in the first place, common shareholders usually get nothing back.
The second type of stock is called preferred stock. This type of stock usually doesn’t grant the authority to vote and its dividend yield is fixed unlike that of common stocks. Preferred stocks are less volatile, meaning they contain less risk at the cost of being less profitable. As it was mentioned earlier, in case of a company bankruptcy and subsequent liquidation, preferred shareholders get their investments returned first.
Becoming a Stockholder
Considering the perks of owning stocks, it might be tempting to just jump right in.
However, there are innumerable variables to consider as well as a mountain of data to go through. It also doesn’t help that the rules of the game keep changing and industries that have been profitable a few years ago, are now going under; while technologies that were considered science fiction a decade ago, now sit at the top of the market.
While some traders opt to undergo this trial by fire, it’s not at all a mandatory experience. Brokers exist for a reason and they can significantly ease the transition towards becoming a stockholder. Finding a reliable broker is a wise opening move for any budding trader. However, redirecting all responsibility to the brokerage firm of your choice can cripple your future as a stockholder.
Here are a few tips to help make your first few purchases less nerve-wracking: