What are Stocks

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Chapter 1 : What are Stocks?

Stock arrow_upward

  • A type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earning.
  • Holding a company's stock means that you are one of the many owners (shareholders) of a company and, as such, you have a claim to everything the company owns.
  • Represented by a stock certificate.
  • Being a shareholder of a public company does not mean that you have a say in the day-to-day running of the business.
  • The management of the company is supposed to increase the value of the firm for shareholders.
    • If this doesn't happen, the shareholders (who own enough shares to have a material influence on the company) can vote to have the management removed.
  • Shareholders are entitled to a portion of the company’s profits and have a claim on assets.
    • Claim on company’s assets is only relevant if it goes bankrupt.
    • In case of liquidation, the shareholder receives what's left after all the creditors have been paid.
  • Profits are sometimes paid out in the form of dividends.
    • The more shares you own, the larger the portion of the profits you get.
  • Another advantage of investing in stock is its limited liability.
    • Even if a company of which you are a shareholder is not able to pay its debts or goes bankrupt, the maximum value you can lose is the value of your investment.

    Why does a company issue stocks?

  • At some point, every company needs to raise money:  
    • By borrowing it from somebody
    • By selling part of the company, which is known as issuing stock
  • If a company borrows by taking a loan from a bank or by issuing bonds, it is known as “debt financing.”
  • If a company raises money by issuing stocks, it is called “equity financing.”
  • Initial public offering (IPO): The first sale of a stock, issued by the private company itself.

  • Financing through Debt vs. Financing through Equity arrow_upward

  • Investing in debt investment such as a bond guarantees the return of money (the principal) along with promised interest payments.
  • This isn't the case with an equity investment; there are risks of the company not being successful.
  • There is no obligation to pay out dividends. Without dividends, an investor can make money on a stock only through its appreciation in the open market.
  • Appreciation: an increase in the value of an asset over time.
    • The increase can occur for a number of reasons:
    • Increased demand
    • Weak supply
    • Changes in inflation or interest rates
    • Appreciation is the opposite of depreciation, which is a decrease over time.

    Types of Stocks arrow_upward

  • The main types of stocks are:
    • Common stocks
    • Preferred stocks
    • Growth stocks
    • Tech stocks
    • Small-cap, mid-cap and large-cap stocks

    Common stocks

  • Ownership in a company and a claim (dividends) on a portion of profits.
  • Investors get one vote per share to elect the board members, who oversee the major decisions made by management.

  • Preferred stocks

  • Some degree of ownership in a company that usually doesn't come with the same voting rights (depends on the company).
  • Investors are usually guaranteed a fixed dividend forever.
  • In the event of liquidation, preferred shareholders are paid off before the common shareholder (but still after debt holders).

  • Growth stocks

  • Shares of fast-growing, higher-risk companies.
  • They offer a higher chance of higher returns and a higher chance of bankruptcy.

  • Tech stocks

  • Shares of technology companies.
  • Like growth stocks, they are generally riskier than other types of companies, but they also offer a chance at very high returns.

  • Small-cap, mid-cap and large-cap stocks

  • Stocks from small, mid-size and large companies.
  • The "cap" is short for capitalization, which is simply the number of shares outstanding times the current price per share.
  • It's important to note that a company's stock can fall into more than one category. Large-cap stocks can be blue-chip stocks, growth stocks or income stocks, for example.
  • Small-cap stocks can be growth stocks, income stocks or tech stocks.

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