If a business needs money to expand or pay debts, it can borrow money through bonds or sell investors a partial interest in the business through stocks. When you buy stock, each share represents a portion of ownership in the business that issues the stock. As a shareholder and owner, you receive certain rights and benefits, but you also incur risks.
Shareholders have an opportunity to make money from their investment in the company. As an owner, you profit from the increase in value of each share when the price rises -- a process called capital appreciation. However, you must sell your shares to turn a paper increase into actual capital gains. When companies make a profit, they often distribute some of it to shareholders as quarterly dividends. Owners of common shares also have the right to vote for the board of directors.
Types of Stock
The two main varieties of stock are common stock and preferred stock. All corporations issue common stock, which comes with voting rights, and some also sell preferred stock. Preferred stock doesn't include voting rights, but it usually comes with a guaranteed dividend payment. Owners of common shares receive dividends only when the company decides to pay them, and the amount isn't guaranteed. Common shares usually increase or decrease in price more than preferred shares do.
Buying shares in a corporation exposes you to risks if the company loses value or goes bankrupt. Because common shares are more volatile in price, they expose you to more risk of capital loss if you must sell in a down market. Preferred shares are sometimes callable, which means the company can buy them back, ending your dividend payments. In a bankruptcy, a company pays its bondholders first, preferred stockholders second and common shareholders last. In this case, common stock investors have the highest risk of losing their initial investment.
Traditionally, stock investors received physical certificates to prove their ownership of stock, but shares today are often registered electronically. When you receive a stock certificate, it represents your proof of ownership, and the issuing company registers the shares in your name, according to the U.S. Securities and Exchange Commission. If you want a paper form, you might have to ask for it and pay a small fee to receive it. With some types of registration, you don't receive certificates. In street name registration, the brokerage keeps electronic records of your ownership, and in direct registration, the issuing company or its agent keeps them.
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