Personal Finance
Lesson 11
3 min

What is a stock?

A stock represents ownership of a share in a publicly listed company of your choice and is usually a medium to long-term investment. Investors purchase stocks when they believe the company’s value will rise over time, when they can then sell their shares for a profit.  

  • A stock represents a share of a company, i.e, a small portion of that company 

  • Investors make money from stocks by selling them for more than what they originally paid for it 

  • It is possible to buy stocks for lower or higher amount of money, it all depends on your budget 

  • There are two types of shareholders: common stockholders and preferred stockholders

In this lesson, you are going to learn the basics about stocks.

What are stocks?

Put simply, a stock is an investment. A stock represents a share - a unit of ownership - of a company, i.e, a small portion of that company. When an investor purchases a share or stock in a company they believe that the value of the company will eventually increase, in which case, the investor will receive a percentage of the company's income in the form of dividends, and the value of the stock will exceed the purchase price of the original investment.

How to generate earnings from stocks

This completely depends on how much money you invest. Investing in stocks is generally considered more high-risk than in other assets, but yields higher rewards. Investors make money from stocks by selling their stock for a higher amount than what they originally paid. 

Once the stock price and, consequently, the market capitalisation of a company increases while the investor owns shares, they can then sell them for more than the original purchase price.

Another way to earn money from stocks is through dividends. Dividends are small shares of the company’s earnings which are distributed to shareholders. Some companies pay their stockholders dividends quarterly or monthly, while some companies don’t pay dividends at all. Read more about what dividends are in our next Academy lesson “What is a dividend?”.

Investors make money from stocks by selling them at a price higher than the purchase price. 


How much does a share cost?

The number of shares of stock you buy will depend on your budget. The amount you spend depends on the share price at the time of your purchase and how much you want to buy. For example, at the time of writing, the price of just one Apple stock is around €337 and most brokers only let you buy whole units of a stock. 

However, innovative brokers and exchanges are allowing you to start investing in stocks for amounts starting from €1. Therefore, it entirely depends on your budget, the amount you are ready to spend and which broker you want to use. An important thing to mention is that you should always do your research on the company you intend to buy stocks from and never spend more than you can afford to lose. 

 
 
 
 

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The two types of stocks

There are two types of stocks, and they both have their advantages and disadvantages: common stocks and preferred stocks.

Preferred stocks

Preferred stockholders do not usually have any voting rights in company matters, however, as mentioned above, preferred stockholders receive priority over common stockholders in case the company goes into liquidation. 

Also, holders of preferred stock usually receive fixed or set dividends before holders of common stock do. This attracts investors who seek stability and potential steady cash flow in the future.

Common stocks

Being the owner of a common stock usually entitles you to vote at shareholder meetings on matters of company development. Holders of common stock may receive dividend payments, however, dividends are not guaranteed and the payments are not fixed. 

If the company goes bankrupt, common stockholders cannot claim the capital they invested in the company until creditors, bondholders and preferred shareholders have received their share first. 

This factor may add some risk. However, it has been proven that in the long run, common stocks usually receive higher rewards than preferred stocks and bonds. 

Friendly reminder

Whether you become a shareholder in the near future or you’re still gathering information, the most important thing to remember before investing in anything is to set up your budget plan, make sure all existing debts are paid off and research the company in which you would like to invest. This will make all the difference when you’re making your first-time investment. 

FURTHER READING 

BOOKS

  • Kratter, Matthew - A Beginner's Guide to the Stock Market

  • Mladjenovic, Paul - Stock Investing For Dummies

How does the stock market work?

How much does it cost to buy stocks

This article does not constitute investment advice, nor is it an offer or invitation to purchase any digital assets.

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