What is stock? How to make money in stocks

BlogNovember 8, 2021

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Stock is one of the financial products that attract the attention of many investors in the world because of its profitability. To be successful in this field, investors need to understand its basic information, such as what stock is, what types of stocks are available, and how to buy/sell a stock. The article below will also provide you with some helpful information related to stock investment (What is stock? How to make money in stocks).

1. What is a stock?

A stock is a security that represents the ownership and legitimate interest of the stockholder in the assets or capital of the company.

For companies, issuing stocks is a form of raising capital to serve the growth plan or the company’s activities such as launching new products, expanding markets, building infrastructure, etc. For investors, investing in stocks is a way to grow their money and outpace inflation over time.

When a company wants to grow its business, it raises capital by issuing stocks. Depending on the number of stocks you buy, if the business grows effectively in the future and the stock goes up, you will make a profit from the business. The more stocks you own, the more profit you receive.

Stock Basic: What Beginner Investors Should Know

Example: Apple Corporation issues 1,000 shares. If you own 1 share of Apple Corporation, that means you get a 0.1% stake. If you own 500 shares, you own 50% of this company.

Moreover, when you hold certain stocks of the companies, you will also be paid dividends. Apple, for example, paid a dividend of over 3 dollars for each stock last year. This is also the reason why so many people are interested in stock investing to grow their health.

2. How to make money in stocks

When you purchase a share of a company’s stock, you can profit from your ownership in two ways:

✓ Appreciation: When the price per share of your stock rises to a level greater than you originally paid for it, you make money. This profit, however, is only on paper until you sell the stock, at which time you realize a capital gain. Of course, the stock price per share can fall below what you originally paid as well. Specifically, your profit will be calculated by the formula:

Profit/loss = (Selling price – Buying price) * Number of shares – Transaction fee

✓ Dividends: Dividends are company profits trickled down to investors when the company makes a profit. Not all stocks, however, pay dividends. Dividends are distributed based on the number of shares they own. For example, if Apple announced a dividend of $0.80 per share, the shareholder with 50 shares would receive a dividend of $40.

Stock Basic: What Beginner Investors Should Know

If you add together dividends and appreciation, you arrive at your total return.

3. What are the different types of stock?

There are two main types of stocks, common stock and preferred stock.

  • Common stock: give owners the right to vote at shareholder meetings and receive dividends.
  • Preferred stock: owners do not have voting rights on company decisions, but it gives owners priority over common stockholders and lower risk instead. Specifically, if the company goes bankrupt, they will be given priority to pay first.

Common and preferred stocks may be classified into one or more of the categories below:

  • Growth stock: is stock of companies with significant future growth potential, offering attractive returns but with a relatively high level of risk. These issuers have a growth speed faster than the market average, typically 15%-20% or more. A start-up tech is likely to be a growth stock.
  • Income stock: offer higher dividends. Investors buy them because of the profits they generate. Income stocks are attractive to investors looking for gradually increasing earnings over the years as a way to offset inflation.
  • Value stock: is stock of companies that is undervalued and traded at below their market value. People buy value stocks hoping that the market has overreacted and that the stock’s price will rebound.
  • Blue-chip stock: is the stock of a large, reputable, and well-financed company with a solid growth history. In the United States, a blue-chip stock typically belongs to a group of companies with a market capitalization of billions of dollars. Some examples of blue-chip stocks are IBM, Coca-Cola, and Boeing.
  • Penny stock: is stock of new companies that is exceptionally cheap, usually less than 1 USD/share. Penny stock is a highly speculative asset.

Another way to categorize stocks is by company size, as shown in market capitalization, divided into large-cap, mid-cap, small-cap, and micro-cap stocks.

Here are some of the most basic knowledge about stocks. Hopefully, through this lesson, you have understood the concept of what stocks are, the types of stocks available on the market today, and how to make money from stock investment.

Investiki.com

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