What are Stocks?

Published by Thomas Herold in Corporate Finance, Economics, Investments, Retirement, Trading

'Stocks' is explained in detail and with examples in the Retirement edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Stocks are financial instruments that are issued by publicly traded corporations. These shares of stocks prove to be the tiniest portion of ownership that you can acquire in a company. Even by owning a single share of a company’s stock you are a small part owner of the firm.

Owning shares of stock gives you the privilege of voting for the underlying company’s board of directors, along with other critical issues that the company is considering. Should a company decide to distribute earnings to share holders as dividends, then you will get a portion of them.

With the ownership of stock, your liability in the company is only limited to the value of your shares. This means that should a company lose a lawsuit and be forced to pay an enormous fine or judgment, then you can not be made to contribute to it. The company’s creditors also can not pursue you if the company runs into financial trouble and goes bankrupt.

Two different types of stock shares exist. These are common shares and preferred shares. The vast majority of shares that are issued are common stock shares. These are the shares that members of the public hold most of the time. They come with full voting rights and also the possibility of receiving dividends that the company pays out.

Preferred stocks come with fewer voting rights but give preferential treatment for dividend payment. Preferred stock issues are paid out before common share dividends. Companies that offer preferred stock typically pay dividends on both classes of shares anyway. Preferred stocks also have a higher claim on the assets of a company if it fails.

Liquidity is a feature of stocks that should always be considered. Common stock shares are almost always more liquid than are preferred shares. Large companies offer the greatest amount of liquidity in the trading of their stocks. Because of the depth of the stock markets, you are able to purchase and sell the shares of practically all companies that are publicly traded at any time that the exchanges are working.

When you purchase a stock, you are looking for two different kinds of gains. Cash flow or passive income with stocks comes from the dividends that they declare and pay out. Capital gains appreciation is realized when you buy a stock at a lower price than the price that you get when you later sell it. While cash flow dividends are smaller payments that are realized on a generally quarterly basis, capital gains turn out to be larger one time returns made when you sell the underlying stock shares investment. At this point, you would no longer own the stock and you would have to purchase another stock in order to work towards cash flow gains from dividends, as well as other possible capital gains.

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The term 'Stocks' is included in the Retirement edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.