Stocks: What is Stocks? Definition of Stocks, Stocks Meaning

What Are Stocks?

A stock is also called equity. It is a part of the ownership of a company. The units of stock are called shares. The number of shares a person has, he is entitled to that much profit or loss in that company. Buying and selling of a company's stock is mainly done on a large scale, on stock exchanges, in accordance with government regulations.

If a company issues its stocks and a shareholder buys those shares, he becomes the owner of that part of the company. For example, if a company has 100,000 shares and a person buys 10,000 shares, the person owns 10% of the company. The shareholder can take a loan or property through his share. If unfortunately, the company becomes indebted or insolvent then according to the law the shareholder cannot sell his shares.

Why do companies issue Stocks?

The company needs money for its development. So, companies issue stock to interested individuals or investors, rather than borrowing money from banks, to finance their operations, research and development, expansion plans, and other strategic efforts.

Types of Stocks

There are two main types of stocks: common stocks and preferred stocks.

(1) Common Stocks

Common stock represents the basic form of ownership in a company. A common shareholder is entitled to vote in the company's decision-making process and receive dividends. However, in the event of a company's bankruptcy, the shareholder may have problems with receiving benefits from the company's assets, as he or she directly owns a small portion of the company's assets.

(2) Preferred Stocks

Preferred stock is different from common stock.  Preferred stockholders cannot vote in the company's decision-making process. However, they have more power over the company's assets and earnings than common stockholders. In the case of bankruptcy, it is much easier for preferred shareholders to get their investments back.

What is shareholder ownership?

A shareholder of a company can sell his shares to another person, can vote in the company's shareholder meetings, and can also receive dividends when the company distributes profits. If you own 33% of a company's shares, you cannot claim outright that you own one-third of that company. Because the entire operation of the company is done by officers like CEO, not you.  The more shares a person has in a company, the more powerful he is in that company.  If a company buys another company, it means that it is buying 100% of the shares of that company. In other words, the number of shares a person holds, he is entitled to that much share of the profits of the company.

How does the owner of the stock earn income? 

There are two ways to earn money by owning shares of stock through dividends and capital appreciation.

• Capital Appreciation: As the company grows, so does the value of the shares. If you sell your shares for a higher price than you paid for them, you can make a profit by doing so.
• Dividends: In this method, companies distribute a part of their profits to the shareholders in the form of dividends. This dividend is usually distributed on a regular, quarterly basis. When this happens, it becomes an additional source of income for the investors.

What is the difference between Bonds & Stocks?

Shareholders are often left with nothing in the event of bankruptcy, which means that stocks are inherently riskier investments than bonds. Because shareholders often get nothing in the event of a company's bankruptcy, bondholders, on the contrary, are given legal priority over other stakeholders. That is, if it comes to return on the investment, the bondholder is paid first. 

The shareholder receives payment by selling his shares to another investor. Bondholders are creditors of the company and are entitled to repayment of the invested principal along with interest. 

How to buy Stocks?

The company issues its stocks through an initial public offering (IPO) on stock exchanges such as Nasdaq, BSE, NSE, and New York Stock Exchange (NYSE). Once stocks go public, they are bought and sold on stock exchanges, using a brokerage account. The price of a stock depends on factors such as supply and demand in the market.

Risks and Considerations

Investing in stocks is a risky activity, as the value of stocks fluctuates greatly due to various factors including economic conditions, market sentiment, industry trends, and company-specific news. That is why it is important to research and evaluate companies before investing. Instead of investing in only one company, we should invest in different companies.

Bottom Line

Stocks represent ownership in a company and offer investors the opportunity to participate in the company's success. By understanding the basics of stocks, you can make more informed investment decisions and potentially reap the rewards of a growing and prosperous company. Remember, investing in stocks involves risks, so it's important to approach it with careful consideration and seek professional advice if needed.