» Stock Investing Basics » Introduction to Stocks

Introduction to Stocks

Stock represents a piece of ownership of a particular company. When you purchase a stock of a company you immediately become one of its owners. As a result you have right over the profits the company makes and some voting rights depending on the type of the stock. So, if you consider the stock profitable and beneficial you should strive to purchase as much shares of it as possible.

The price of the stock is set following certain rules. Generally, stocks are traded on the stock market, which tends to determine the value of the company on daily basis.

The major factor that determines the value of a stock is its earnings. They are mostly in the focus of attention. Every company makes a report of the profits it has made every quarter. These numbers are of great interest to most investors, since they tend to base their investment decisions on them. Investors use earnings per share as an indicator of the current state of the company and its future position.

A positive attitude is awarded to companies that report quick growth in their earnings as well as earnings growth that is stable. Many investors target companies that don't experience positive earnings, but are predicted to shift their losing position into a winning one in the near future. What is not looked at with a good eye is if the company sustains losses for which no good reasons are provided. Additionally, the market will not accept companies that have a declining earnings trade.

Stocks are generally characterized as experiencing an upward trend over the long term. However, this is not guaranteed in whatsoever way especially when we consider individual stocks. You will enjoy profits from stocks only if their price increases.

You should keep in mind that no company is insured against going bankrupt. If the company of which you own shares does go bankrupt you will lose your investment. Fortunately, this doesn't happen every day. The company may experience short term problems, but if its management is effective enough it will manage to overcome them and put its price back to balance.

As you can see, stock investing carries a certain degree of risk. However, there are ways in which you can control the level of risk to which you are exposed. The key is in diversification. This means that you should strive to include in your portfolio different types of stocks. If a fall of one stock is experienced it will be compensated by an increase in another. Additionally, you should try to get the best out of compounding.

When you purchase a stock of a company, you are assigned the right to vote on different issues concerning the company. A Board of Directors is elected, which tends to supervise the management of the business. The major goal of the company's management is to increase the value of the equity the company possesses. If the management fails to accomplish this goal, the shareholders are in their right to remove it.

Being an individual investor you should not think that you will be able to accumulate enough stock to govern the company. Instead the major influence is in the hands of institutional shareholders or a group of company's insiders. So, when you select companies you should include management examination as part of your analysis.

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