What Are Stocks? How They Work and How You Can Invest
When it comes to investing, stocks are one of the first financial instruments that come to mind. Along with bonds, stocks form the basis of a balanced portfolio. Owning stocks not only gives you a stake in the success of companies you believe in, but it also opens up lucrative opportunities for profit. This article will help you better understand stocks, how they work, and how you can get started in this exciting financial market.
What are stocks?
Stocks are certificates that represent partial ownership of a company. When you buy a stock, you become a shareholder – meaning you have the right to a portion of the company’s profits, as well as to participate in important decisions through voting rights (depending on the type of stock).
Benefits of owning stocks:
Capital gains: The price of a stock increases over time, allowing you to sell it for a higher price.
Dividends: Some companies distribute profits to shareholders in the form of cash or stock.
Voting rights: Common shareholders can vote at annual shareholder meetings.
Types of shares
1. Common shares:
The most common type, providing voting rights and the opportunity to receive dividends. However, if the company goes bankrupt, common shareholders will receive money after preferred shareholders.
2. Preferred shares:
Do not have voting rights but have priority in receiving dividends and assets if the company dissolves. Some variations of preferred shares include:
Callable shares: The company can buy back shares in the future.
Convertible shares: Can be converted into common shares.
Cumulative shares: Unpaid dividends are accumulated and paid out first.
Participating preferred shares: Receive fixed dividends and additional bonuses if the company meets financial targets.
Types of stocks according to investment strategy
Growth stocks: Companies with fast revenue/income growth, little or no dividend.
Income stocks: Pay high and regular dividends, suitable for stable investors.
Value stocks: Low price compared to actual value, attractive to long-term investors.
Blue-chip stocks: Stocks of large, stable corporations such as Apple, Coca-Cola.
Large-cap stocks: Companies with market value over $10 billion.
Mid/small-cap stocks: Higher growth potential but also riskier.
Penny stocks: Priced under $5/share, often high risk and low liquidity.
Stock Market Sectors
The market is divided into 11 major sectors, including:
Energy – ExxonMobil, Chevron
Materials – Dow, DuPont
Industrials – General Electric, Caterpillar
Utilities – Duke Energy, AEP
Healthcare – UnitedHealth, Cigna
Financials – Bank of America, Visa
Consumer Discretionary – Starbucks, Disney
Consumer Staples – Procter & Gamble, Target
Information Technology – Microsoft, Alphabet
Communication Services – AT&T, Comcast
Real Estate – American Tower, Crown Castle
IPOs – How Stocks Go to Market
An IPO (Initial Public Offering) is the process by which a company issues shares to the public for the first time to raise capital. Investment banks such as Goldman Sachs are often the underwriters for IPOs. Once listed, the shares are traded on major exchanges such as the NYSE or Nasdaq.
How Stocks Work
Stock prices are determined by market supply and demand. If there are many people who want to buy (high demand), the price goes up. Conversely, if there are many people who want to sell (high supply), the price goes down. When you place a buy or sell order through a broker, they route the order to the most appropriate place – such as an exchange, a market maker, or an ECN system.
Stock Trading: Analysis & Strategy
Technical Analysis: Uses price and volume charts to find buy/sell points.
Fundamental Analysis: Uses financial reports and economic indicators to assess intrinsic value.
Trading Strategies:
Day Trading
Swing Trading
Long-Term Investing
How to Start Buying Stocks?
You can open an account with a brokerage firm like Ameritrade, Fidelity, or Robinhood. Today, most trading is commission-free and requires no high minimums.
Additionally, some companies allow you to buy stocks directly through a direct stock purchase plan (DSPP), which saves on transaction costs.
Conclusion
Understanding stocks is an important first step to building long-term wealth. Whether you are a beginner or an experienced trader, doing your research and choosing a strategy that fits your personal financial goals will help you participate in the stock market effectively and sustainably.