A stock is defined as a type of security (financial product) that signifies ownership in a company; in order words if you buy stock in a company, you own a portion of the company. Your ownership in the company is determined by the number of shares you own relative to the number of outstanding shares.

 

 

Types of Stocks: There are two types of stocks, Common and preferred stock

 

Common stock: gives owners the right to vote at shareholder meetings and also receive dividends if that company pays dividends

 

Preferred stock holders do not have voting rights but receive dividend payments before common stock holders. They also have priority over common stock holders if a company goes bankrupt and its assets have to be liquidated.

 

Stock categories: Stocks can be categorized by the size of the company, usually by the market capitalization. They can be categorized as large-cap, mid-cap and small and micro-cap. There are stocks called Penny stocks that are lower priced stocks (usually under $5 a share). These stocks are very speculative and have little to no earnings.

 

Stocks are further categorized as Growth, Value, Income (dividend) or Blue chip stocks.

 

 

Growth stocks are stocks that generate earnings that are growing at a faster rate than market averages, usually 20% or more. These stocks usually do not pay any dividends because they reinvest all of their earnings back into the company to grow even more. Investors will usually purchase growth stocks for the capital appreciation. Growth stocks are usually young start-up companies with a lot of potential to even grow more

 

 

Value stocks are stocks that have low price to earnings ratios which means they are usually out of favor with investors. Usually when stocks trade at low price to earnings ratios or multiples it means investors are not too bullish on the stock’s growth potential in the future. These stocks usually trade at lower prices compared to their fundamentals and thus might cause some Investors to purchase the stock with the expectation that  price will increase at some point in the future after the market realizes its overreaction.

 

Income stocks (dividend) are stocks that pay dividends, investors will usually purchase them for the income they generate. These dividends are not always guaranteed by the company. Companies can choose to discontinue or resume paying dividends at any point in time.

 

Blue chip stocks are large and well-known companies that pay dividends and have been around for a while with a solid growth history.

 

How do you make money on a stock that you’ve purchased? You make money on a stock in two main ways, if the price of the stock increases, also known as capital gains, and dividends that a company pays to investors, if that company pays dividends.

 

Dividends are payouts that some companies make to shareholders that reflect the company’s earnings. They are usually paid out by companies on a quarterly basis, but not all companies pay dividends. Dividends are also not guaranteed, meaning a company can stop paying them at any time. Reasons why companies pay or stop paying dividends vary, but I am not going to delve into some of those reasons in this article.

 

Benefits and Risks of owning Stocks:

 

Return and growth

 

Stocks offer great potential for growth and high returns especially if we perform our research properly and pick the right companies to invest in. They also offer great potential for growth (capital appreciation) when held for long periods of time. Stocks tend to fluctuate a lot in price, meaning their price can go up or down. This makes holding stocks very risky because there is no guarantee that a company whose stock you own will grow and do well.

 

A common stock in a company can be worthless if the company goes bankrupt. This is because when companies go bankrupt their assets are liquidated and common stockholders are the last in line to share in any proceeds. Usually when a company goes bankrupt their bondholders are the first to get paid followed by preferred stock holders and then common stock holders, if there is anything left.

 

Liquidity

 

Stocks are very liquid, meaning they can be sold and easily converted into money compared to other assets like gold and some commodities. This makes owning stocks very convenient because you can quickly sell or buy stocks without any worries.

 

Reduced Taxes

 

If you own stocks and you lose money on those investments you don’t have to pay any taxes on the lost investment. For example if you have income of $80,000 in a year and you lose $40,000 in investments that year, you only have to pay taxes on just $40,000 in income. This is one way you can offset any high earnings so that you aren’t paying much in taxes.

 

How do you buy stocks?

 

Stocks are usually traded on a stock exchange and can be purchased through a broker.  To purchase stocks you first need to open a brokerage account. A brokerage account is an account opened with a broker that allows you to purchase securities such as stock.

 

Types of Brokerages

 

The two main types of brokerages are discount brokerages and full service brokerages.

• Discount brokerages are usually cheaper compared to full service brokerages due to the limited amount of services you receive with a discount broker. 

• Full service brokers offer many more services to investors than discount brokers, and usually charge higher fees for their extra services.

 

 

 

Things to consider when choosing a broker:

 

When choosing a broker always consider the fees the brokerage charges for services and the services they offer. It is always good to compare fees and services of brokers before you make a decision

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