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Stock Investing Basics

Stock Definition

When you purchase a stock you purchase a unit of ownership of the particular company. Common stocks give you the right to vote on important issues concerning the activities of the company. Additionally, you have the right to decide on the members of the board of directors.

As an owner you get a certain percentage of the profits in the form of dividends.

Types of Stocks

Basically, there are two types of stocks:

  1. Common stocks- provide voting rights and dividends.
  2. Preferred stocks - no voting rights are provided. However, if the company is dissolved, stockholders that hold preferred stocks are the first to get dividends and assets. This type of stocks is chosen by investors that prefer dividend income.

Class A vs. Class B Stocks

The company itself decides on the classes of stocks that are to be issued when it goes public. Class A stocks are offered to the general public and give their holders one vote per share, thus they are traded as common stocks.

On the other hand, the company may issue class B stocks that are offered only to the company's founders. These stocks carry 10 votes per share. The goal is to keep control of the company within the hands of the founders.

Daily Stock Price Establishment

In the setting of the prices of actively traded stocks the laws of supply and demand are followed. This means that when the demand is high (more buyers than sellers) the price rises. The vice versa is true when the supply is higher than the demand (more sellers than buyers).

The number of buyers and sellers is influenced by the following factors:

  • Economic events
  • Political events
  • Natural disasters

If the magnitude of these events is significant, the overall conditions in the market can be drastically changed.

Risk in Investing

Investing and risk go hand in hand. Risk can be defined as the price of the potential reward you will get. Risk and reward follow a linear direction, which means the higher the risk the greater the potential reward you will get from a particular investment.

Thus, you should identify the level of risk you are willing and able to face. Additionally, you should be able to determine the risk that a particular stock carries so that you can determine whether it is worth purchasing it.

Finally, investments that are characterized with low levels of risk also bring lower returns. So, you should determine for yourself whether you are willing and able to take a lower risk and lower returns or risk more and potentially gain more.

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