When you buy a share of stock, you're buying a share of ownership in a corporation. This entitles you to all the rights of a company owner, including the right to vote on certain company issues, a share of potential profit if the company grows, and a share of the losses if the company fails. Understanding basic facts about stocks can help you make smart investment decisions to better meet your financial goals.
How Stocks Make Money
Stocks earn money for investors in two basic ways. First, the stock price can go up thanks to company innovations or growth. If that happens, you can sell your share of stock at a price higher than what you paid for it and pocket the difference. When a corporation makes money, they may decide to pay this money out to stockholders in the form of dividends. Of course, not every company pays dividends to investors. Some simply hold onto the money and reinvest it into the corporation. These reinvested funds are known as retained earnings. Keep in mind that the price of a stock can fall as easily as it can rise. Investing in stock offers no guarantee that you will make money, and many investors lose money instead.
Types of Stock
Stock comes in two basic varieties: common and preferred shares. Common stock generally allows the shareholder to vote on company issues, but it comes with no other special rights. Preferred stock holders typically can't vote, but they receive some other preferential treatment. Depending on the company, this special treatment may include preferred access to dividend payments or a larger distribution of assets if the company fails. For example, if a corporation goes bankrupt, a preferred stockholder might get more of his investment back than a common stockholder.
Stocks feature more than one price, and those new to investing can easily become confused by the differences between these numbers. The market value or market price of a stock is the number you see on stock tickers and in the newspaper. This is the price at which you can actually buy or sell a stock for. Par value is an arbitrary number that the corporation assigns to each share. It has little to do with the market price of a stock, and many stocks are bought and sold for prices vastly different than the par value.
Learning About Stock
The United states Securities and Exchange Commission requires each company that sells stock in the United States to provide specific information about the company and its stock. The prospectus provides valuable information about stocks, including historical prices and company plans and goals. This information comes in a document known as a prospectus. You can access the prospectus for a certain stock by contacting the company, or by logging onto the SEC's EDGAR database.
While some companies sell stock directly to investors, most only sell stock through a brokerage. Depending on the brokerage firm you choose, you may call an agent to buy stocks or simply buy and sell shares online. Brokerages charge various fees, from account management fees to fees associated with each individual trade.
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