A stock is, basically, a share in the ownership of a company. By becoming a shareholder of the company you become entitled to the earnings and assets of the company. As one acquires more of the company’s stocks, his ownership stake in the company becomes higher. Stocks can also be called shares or equity.
By becoming the owner of a stock of the company, you have a claim on everything the company owns- furniture, trademarks, and so on. However, your ownership is proportional to the percentage of company’s shares you own; so usually you’ll have a very less claim over the company’s total assets.
Why companies sell stock?
A person owns a company which is doing great. Its products are doing well in the market and profits are quite high. Why then would the person sell the stock of his company instead of owning 100% of the company? After all, he knows the company will do great in the future too.
The answer to that is: to get money. Any company needs cash to grow. So, to acquire the cash for the company to grow beyond its current size, the company is made a public company by selling its shares or stock.
Why people buy stock?
So, why would one buy the stock of a company? They buy a specific company’s stock because they think the company can do well. Now, if the company does well the shareholder benefits too because the value of the stock they hold rises and they can sell the stock for a higher price than they had bought for, thus earning a profit. Also, if a company does well and earns some profit it may decide to send out its earnings to its shareholders. Each shareholder receives a fraction of the money, called dividend, based upon his ownership stake in the company.
So, that is why people go into the trouble of buying stocks.
Understanding risk
Before buying the stock of any company, no matter how “great” it may be, you should understand that stocks involve a lot of risk and if not decided properly you can lose your hard-earned money. However, if you choose your stocks really well, high risk can equal to higher returns on your investment. So, one should really do a lot of research on what a company (and its rivals) is up to before buying its stocks.
In the stock exchange you can make different types of investments- long term, short term, value, growth and the list can become very long. Also, you can invest in companies sector-wise (for example you may choose to invest in manufacturing and infrastructure.
This article is just an introduction to stocks and you probably have much more to learn before putting your money on stocks. Remember, you don’t have to be a millionaire to start investing. You can start investing with small amounts you’ve saved. And maybe one day, you could wake up to find yourself a millionaire.
