Every day stocks worth hundreds of billions of dollars are traded across the world. The stock market forms an integral part of any economy and it acts as a great place for people to earn returns on their investment. Understanding what stocks are and how the market functions can help you make smarter investments and lower your risk.
Table of Contents
Chapter 1: Introduction to Trading Stocks
Chapter 2: Different Categories of Stocks
Chapter 3: Functioning of The Stock Market
Chapter 4: Stock Market and Price Movements
Chapter 5: How to Buy Stocks
Chapter 6: Choosing Your Investment Strategy
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Chapter 1: Introduction to Stocks
– Why Do Companies Issue Stocks?
– Why Do Investors Buy Stocks?
Chapter 1: Introduction to Stocks
To put it very simply, a stock is a unit of ownership in a company. The stockholder is part owner of the firm, with his ownership being limited to the amount of stock that he holds. Also known as ‘shares’ or ‘equity’, stocks are one of the most popular investment options worldwide.
Your ownership in a company gives you some power over its decisions, and how much power you have depends directly on how much stock of that company you own. Of course, you will need to hold a significant share of the company to make any material difference to its operations.
Shareholders have a right to participate in all major decision making processes of the company. Each share represents a vote and with sufficient shareholding, you can change the direction that a company takes.
Why Do Companies Issue Stocks?
Companies issue stocks when they need to raise capital. A startup can offer an IPO (Initial Public Offering), making shares available to the general public. Investors pay for those stocks to get a share in the profits of the company and the company gets enough money to expand its business. After the IPO, the firm becomes a public company. A public company also has the option of issuing new shares to raise more capital.
When the company raises funds in this manner, it gains several advantages. There are no creditors to repay and no periodic interest outflow. The money comes from shareholders who own a part of the company and are as interested in its success as the founders of the business.
Adding a few solid stocks to your investment portfolio gives your savings growth potential and diversification. In fact, stocks have traditionally proved themselves as one of the most lucrative investments possible. Investment experts suggest that every portfolio must have at least a few blue chip stocks or stocks of other established, sound companies which can hold their own even in bad economic conditions.
Investors Buy Stocks From Two Perspectives:
Buying and Selling
To make money by selling the shares when the value appreciates.
Long Term Steady Earnings
To reap regular earnings from the share in the form of dividends. Dividends are a share of the company’s profit distributed among the shareholders.
When you hold a share, you enjoy the dividends and can still sell when the price is right at a profit, thus gaining both advantages. This is especially profitable when you invest in an established company which has a proven track record of good performance year after year.
With these stocks, you not only get consistent dividends but also have a ready market of willing buyers whenever you decide to sell. Such stocks are a good option for a long term investment portfolio.
Next Chapter: Different Categories of Stocks