This tutorial introduces stocks and the stock market. It also covers the meaning of stocks and what they do for investors.
We will cover these topics:
- What Is Stock?
- Why do Companies Issue Stock?
- What are Stock Exchanges?
- What Benefits Do Investors Get From Stock Ownership?
WHAT IS STOCK?
Stock is ownership in a company, with each share of stock representing a tiny piece of ownership. The more shares you own, the more of the company you own. The more shares you own, the more dividends you earn when the company makes a profit. In the financial world, ownership is called equity.
There are two primary classes of stock. The one you choose depends on what you want from a stock. Preferred stock typically pays regular dividends and is favored by investors who want income foremost from their stocks. Common stock represents ownership of a company and may offer more rights and privileges than preferred stock.
Investors may purchase stock on the primary or secondary market. A company sells its stock to the public on the primary market through its initial public offering. Investors may sell their shares through brokers to other investors on the secondary market. The secondary market can be structured as an auction market, like the other exchanges, or a dealer market, like the NASDAQ. Stock prices can be found (quotes) in newspapers, on television and the Internet.
WHY DO COMPANIES ISSUE STOCK?
Businesses issue stock to raise money. They use this money to finance expansions, pay for equipment, and fund projects, etc. Corporations issue stock when they may need additional capital to operate successfully.
The fancy term for issuing stock to raise money is equity financing. The money received from investors who buy stocks is called equity capital. In the world of securities, the word "equity" usually refers to stocks. The other method of raising money is debt financing, which involves selling bonds. That is the subject of other tutorials.
When companies make profits, they may reward their stockholders with pieces of their profits, known as dividends. Dividends are an incentive for investors to hold stocks.
Now that you know the why of buying stocks, you will need to know the where.
WHAT ARE STOCK EXCHANGES?
Exchanges are the physical locations where stocks are bought and sold. They are the sisters of the over-the-counter (OTC) market. The OTC refers to a market in which securities transactions are conducted through a telephone and computer network connecting dealers in stocks and bonds, rather than on the floor of an exchange. Together, these two markets form the secondary market. The primary and secondary markets together make up the stock market.
Exchanges are located all over the world, with the most famous one being the New York Stock Exchange. The NYSE annually trades almost $12 trillion dollars worth of capital. Thousands of stocks are listed on this exchange. When you buy a stock, you will need to learn which exchange(s) list it. Other than locating a quote in the newspaper, with online trading and the automation of order systems, there is very little reason to determine where the stock trades from the customer's viewpoint.
The Securities and Exchange Commission (SEC) regulates stock trading and exchanges. Additional regulation is administered by The National Association of Securities Dealers (NASD). The NASD makes and enforces rules for its members and enforces federal securities acts and the SEC makes rules for its membership. As you read more about investing, you will become more familiar with these organizations and their protective regulations.
All the technicalities aside, read below to learn what you, as an investor, get out of stock ownership besides your piece of the company.
WHAT BENEFITS DO INVESTORS GET FROM STOCK OWNERSHIP?
In addition to owning part of a company, you have the potential to receive monetary benefits when you own stock shares. Owning stock may allows you the opportunity to earn money on money.
Historically, stocks have performed better than most other investments. This is a testament to the growth of the economy in the United States. From 1955 to 1994, the average yearly return of a share of stock was approximately 10 percent. This means that if $10,000 were invested in stocks in 1955, and dividends and capital gains were reinvested instead of kept, this $10,000 would have been worth about $444,000 by 1994.
We hope you have gotten a better idea of stocks and the stock market from this tutorial.
