What are stocks?
A stock represents a share (a small unit of ownership) of a company. Investors purchase stocks or shares when they believe the value of the company will eventually increase. If that happens, 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.
There are two types of stocks: common stocks and preferred stocks. Both have their advantages and disadvantages: What are preferred stocks?
Preferred stockholders do not usually have any voting rights in company matters. They do, however, 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.
What are common stocks?
Common stockholders are usually entitled 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.
How to earn money from stocks
Earning money from stocks depends completely on how much money you plan to invest. Investing in stocks is generally considered more high-risk than other assets, but it also yields higher rewards. Investors make money from stocks by selling their holdings 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.
