What Is Stock and How Does It Work?
Many people buy stock to get a return on their investment. The money that they invest in the stock allows them to achieve their financial goals and grow their wealth. Buying shares of a company means that you’re taking a risk, and if you’re wrong, you could lose a significant amount of money. Corporations also need money in order to grow, and this capital is often raised by issuing more shares of stock. If the corporation grows, you stand to profit by selling your shares at a higher price.
A company’s stock price reflects its value to the market, and is driven by many factors. One of these factors is its customer satisfaction. If a company’s customers are satisfied with their service, the market value of that stock will rise. Another factor is earnings growth. In general, the better a company does with its business, the higher its stock price is likely to go. Those two factors are often related to one another, so it’s important to know what they are.
The value of a stock is determined by two factors: supply and demand. Supply is the number of shares that are for sale, while demand is the amount of shares that are sought by investors. When the amount of stock available for sale is more than the number of investors wanting to buy it, the price of a stock goes up. If there’s a shortage of buyers, the price goes down. The same thing happens with demand. If the number of investors buying shares is higher than the number of available buyers, the price of a stock rises. The price will then equalize with all of the investors.
While stock is a type of property, it also represents a form of ownership in a public company. By purchasing a company’s stock, you become part-owner of the business. A company’s stock certificate represents 1% of its ownership, and owning it gives you voting rights. There are two kinds of stocks – common and preferred. Common stocks give you the right to vote at company meetings, while preferred stocks do not. Preferred shareholders are legally entitled to a certain level of dividend payments.
Shareholders receive special privileges, depending on their type of stock. For example, you may have voting rights on board elections or priority in getting profits or liquidation proceeds. However, these privileges are primarily subordinate to the rights of creditors, so it is critical to read all the paperwork before you buy. You may be surprised to find out that you were mistaken about a particular company’s stock. Then again, you may have an idea of which stock is best.
Dividends are not guaranteed, and you should be aware that companies have the power to reduce or eliminate them. Young, rapidly growing companies are likely to avoid paying dividends, and instead reinvest their profits. That way, they can continue to grow and generate profits, which leads to a higher stock price. However, while stocks offer the greatest potential for growth, they aren’t without risk. If the company experiences a difficult time, it may post losses, or earnings expectations that fall short of expectations, the stock price may plummet.