Stocks are a piece of ownership of a company and tradeable via a financial broker. Ownership can provide a variety of benefits.
Owning one or more stocks or shares can give you a variety of benefits including:
- The holding right of a stock, which can be sold at a later stage (ideally for profit)
- The earnings right to a part of the companies profits, in the form of dividends.
- The voting right to decide on strategic decisions, weighted by share of ownership.
The holding right on stocks
The one right you receive by default when buying a stock or share is the holding right. This means from the moment of purchase, the stock is now in your possession (usually through a broker) and may not be touched by anyone else.
Only in rare situations may a broker touch your stocks, like in the request for a transfer of your stocks, made by you, to a different brokerage.
Another reason might be that the company has defaulted, meaning it has gone bankrupt. In this case, depending on the money left, you may receive an offer for your stock, or it might become worthless.
Finally, a company might be acquired or taken over by a competitor. In most cases, this leads to an offer made by the purchasing company, to you for the stocks and shares held, at fair value. In cases the company is valued above market value, this offer can lead to more money received, than if you would have sold in the financial market.
The earnings right on stocks
Buying into a particular type of stock called dividend stocks, will give you a potential frequent payout of money or more stocks, from that company. A dividend payout is effectively a reward for shareholders, for believing in the companies future and by investing their money.
This means, the better the company performs over time the larger a dividend payout tends to be. Moreover, the company is also more likely to increase its payout ratio and the dividend payout amount you get.
On the other hand, there are plenty of stocks that do not pay any type of dividend. These can either be referred to as regular stocks or growth stocks.
A growth stock is a share of a company that has been known to grow fast in sales numbers. Its growth attracts investors as the stock values increase over time, which leads to a non-realized profit for investors. Unless they sell the stock later, which makes the profit realized in their investing account.
The voting right on stocks and shares
Once you own a part of a publicly-traded company, you often receive the right to decide on larger decisions affecting the companies future. In order to be allowed to vote, however, most companies require their shareholders to hold at least X% in shares.
Although this is a common practice, it can eliminate many beginning investors, as we tend to invest a smaller amount of money (per company). In fact, it can be a tedious process if ownership of the company is divided into a few top employees holding most of the shares. In this case, the decision can be decided amongst themselves, as their choice weights more.
So why Stocks?
Stocks are one of the most basic financial instruments. It's also called an original or the underlying asset, for other product types. If I just lost you there, do not worry! All you need to know is that stocks are tied to the perceived value of a company, which is as direct as a financial instrument gets.
Overall benefits of financial stocks
Alright, that's all nice and dandy I can hear you think. But how about the zoomed-out benefits?
Well, a stock allows you to invest in a company you believe in. This can be due to a promising financial future in your opinion, a strong historical one thus far, or maybe an ethical take on business that overall improves the world we live in.
It can also be a gamble if you choose to invest in a penny stock, in the hopes the company will grow to a decent-sized organisation.
Not all sunshine and rainbows
On the opposite spectrum, we have some serious drawbacks to consider. Firstly, a publicly-traded company does not need to be making any profit. Meaning, without proper financial analysis on your end, you could be investing in a (soon to be) failed company, losing you money.
Similarly, should the above situation happen to you, without having invested in other stocks, your lack of portfolio diversification, would mean there is no other company to offset your loss.
Therefore, Investing Guides investors always make sure to have at least a handful, if not more, stocks at the same time. Understanding your risk tolerance can help you decide on which amount of stocks make you sleep at night.
What about other products?
Slow down, cowboy! The financial market has plenty of other products you can choose from. However, we won't go into these here. The only teaser we will reveal is something called an ETF (Exchange-traded product).
An ETF is essentially a list of stocks, you buy into at one go. Meaning, your money is immediately diversified in at least one way. But let's get back to stocks and shares.
Not done reading more about stocks? We really like the page at Economic times, which might be a bit more in-depth, but remains rather concise too.
Stocks and shares FAQ
Below's FAQ should help you look at the topic further & provide a summarised view of the above:
A stock is referring to plural ownership, whilst a share mentions one company in particular.
The buyer will receive the right to hold the stock and might also be allowed to earn dividends and vote on particular company decisions.
A dividend stock gives the buyer the right to receive money from the company at a specified frequency.
Growth stocks are companies that (are expected to) grow faster than average markets, increasing their value over time.
A stock allows you to invest in companies you believe in. For example because of a promising financial future, a strong historical one, or an ethical innovation that improves the world.
Without due diligence, a stock investment can lead to losing (a portion of) your money. Only invest what you can afford to lose.
Stocks and shares are a viable option for most people. ETFs can introduce more diversification too. Other instruments require a more thorough understanding before you decide to use your money.