Before one begins investing in stocks, it is absolutely essential that he or she begin by learning the basics. Investing in stocks may appear relatively basic at first glance. However, in order to truly capitalize on investing, you must be properly educated on the topic. We will discuss the various types of ownership in a company (primarily focusing on stocks), the rights you gain by owning stocks, and more.
Have you ever wondered how investors were able to exchange and transfer public companies stock between each other? Well, stock is now primarily electronically traded at stock exchanges around the world. Among these exchanges are New York Stock Exchange (NYSE), National Association of Securities Dealers Automated Quotations (NASDAQ), American Stock Exchange (AMEX), Euronext, London Stock Exchange, and numerous more. These exchanges are generally linked to a physical location, but with the advent of technology the physical locations are no longer a necessity. These stock exchanges allow for relatively smooth and flawless stock trading to occur between individuals and institutions. Stocks are also given symbols (usually consisting of letters) to differentiate between companies. Some symbols include GOOG (Google), BA (Boeing), F (Ford), and WFC (Wells Fargo), to name a few.
There are also various levels of ownership of a company. The stock most people refer to is common stock. Common stock gives the investor the right to vote on certain company issues. Each share generally equates to one vote, however that may vary based on the companies policies. The downside to common stock is that in the case of a company bankruptcy, these shareholders may lose their complete initial investment. Creditors, bond holders, and preferred stock holders receive the left over cash and assets before common stockholders respectively. Yet, common stock usually offers higher return or yield on the initial investment and is highly liquid (the relatively timely and easy process of converting an investment into cash).
Preferred stockholders, on the other hand, do not have voting rights. The company pays a fixed or floating (changing) dividend to the stock holders ordinarily. They also have the right receive their dividends before common stockholders, along with cash and assets in the case of a bankruptcy. This allows for a more secure investment, but may not lead to as significant of a return on your investment.
Bonds allow investors to capitalize from corporate debt. Investors purchase bonds for face value, or the initial investment cost for each bond (usually $100 per bond). The company is bound by law to repay at least the face value or initial investment in most cases. Furthermore, investors receive interest which is determined by the coupon. The coupon may be fixed or floating similar to preferred stock. Bond holders receive their initial investment before any of the afore mentioned investment methods. This results in a high level of security, but decreases its liquidity. Therefore, bond holders are required to maintain the bonds until the maturity date (a set date when the company has agreed to repay the debt) when the initial investment is returned along with any owed interest. However, investors may opt out before the maturity date, which usually results in a monetary penalty.
The obvious question you ask, “Why should I invest in common stock if it is so vulnerable to bankruptcy?” Well, a major concern of investors is to hedge against inflation. Inflation is the reduction of value a currency posses in buying power. This may be caused by various reasons, but we won’t go into detail here. If investors do not stay ahead of inflation, the value of their wealth and buying power will dwindle over time. Stocks allow not only a hedge against inflation, but also the possibility of more aggressive growth above the other investment choices discussed above. In some cases, investors such as Warren Buffet have become extraordinarily wealthy through long-term investing. However, investors must also be highly vigilant so as not to lose their wealth. Yet, I believe through steadfast and persistent learning, you may also become a brilliant investor.