Investing for Beginners: What is a Stock?

It has been a while since I have posted anything on my blog. Most of my previous posts have been about religious topics, but I have picked up a new interest within the past year: investing.

At the time of this writing, I am in the middle of working through a master of science in finance program. I want to share some of the financial knowledge I’ve picked up in my studies. With that said, let’s talk about…

Stocks

AKA shares or equities.

Equity means ownership. Buying a stock is buying a portion of ownership of a business.

A business sells stock, most commonly with the help of investment bankers, to raise money to grow the business.

When you buy stock, you are most likely buying through a brokerage account and from a broker-dealer or another investor. You are not usually buying the stock directly from the business that is selling.

As a stock owner, you get voting rights and a potential portion of the profits earned by the business.

Voting Rights

You can vote on any issue that is put to vote at the annual meeting of a business.

One important issue, among others, is voting for the board of directors.

The board of directors selects the management that runs the business on a daily basis and makes sure that they are doing a good job.

You can either cast your vote yourself at the annual meeting or designate someone else to vote for you, called a proxy vote. Instructions and information on voting procedures are usually sent through mail or email.

As a stock owner, you may not have much influence on issues put to vote unless you own a large percentage of the business.

How to Profit from Stocks

There are two main ways to profit from stocks. The first is dividends, and the second is capital gains.

A business may decide to pay out some of its profits to its stock owners. These pay outs are called dividends. Dividends are usually paid quarterly (four times a year).

Not every business pays dividends.

Businesses that are not yet profitable, usually newer businesses, will not pay a dividend. Other, profitable but growing, businesses reinvest most of their profits back into the business; they pay little or no dividends.

Businesses that have been around for a while and are growing at a slower, steady rate are more likely to pay dividends. They do not reinvest as much and so have more money to pay out to stock owners.

The stock price can move higher than the price at which you initially purchased a stock. This is called a capital gain. The reverse can also happen. The stock price can fall below your initial purchase price. This is known as a capital loss.

You may choose to sell when the stock price moves higher than your initial purchase price. In this case, you will make a profit. Buy low, and sell high is the old saying. Keep in mind that your profits will be taxed.

Buy a stock. Own part of a business. Vote at an annual meeting. Profit from dividends and capital gains. These are the basics.

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