Definition of Stocks
When a company needs money to grow, the company can choose to offer ownership shares to the public through stocks. A stock, also called equity, is a security that holds proportionate ownership of a corporation. When you own company stocks, you can earn more as the company grows, giving you shareholder voting rights. For instance, if a company owns 100,000 shares and purchases 1,000, you own 1% of the company.
Types of Stocks
There are two main types of stocks: common and preferred. If you are a common stockholder, you usually vote at shareholders’ meetings, and the company gives you dividends. As a preferred stockholder, you do not have voting rights. For example, if there were a vote on the new board of directors, common shareholders may have a say, whereas preferred shareholders would not vote. However, they have a higher asset and earnings claim than the common stockholders. If the company goes bankrupt, the preferred stockholders must be paid first before common stockholders get anything.
How Stocks Work
Companies sell stocks to profit from developing the business, paying off debt, or launching a new product type. When the company issues stocks to the public for the first time, it is called an initial public offering (IPO). After investors purchase shares, they can resell their shares on the stock market, and the exchange tracks the supply and demand of each listed stock.
The buyers will offer a “bid,” which means the highest amount they are willing to pay, and typically it is lower than the price sellers “ask” for. If a company cannot perform well and the value of its shares decreases, shareholders can lose part or all of the investments when they sell.
Even if the process looks complicated, computer algorithms do most of the work, including price-setting calculations.
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