STOCKS BASICS: WHAT ARE STOCKS?

What is Stock?

Stock is the share in the rights of the company. Stock defines the claim on company’s assets and earnings. More you acquire stock, greater will be your post in the company.

There are usually two types of stock. One stock is common stock. One stock is preferred stock.The difference between the two is,in common stock, the holder of the former has voting rights that can be exercised in corporate decisions. In preferred stock it doesn’t has voting rights. The preferred shareholders are legally entitled to receive a certain level of dividend payments before any dividends can be issued to other shareholders.

There is also another called ‘convertible preferred stock’. This is a preferred stock with an option of converting into a fixed number of common shares. It usually any time after a predetermined date.

Stocks often called as equity or equities. They are usually distributed by companies to increase capital to grow the business or in order to take new projects. There are important differences between whether somebody buys shares directly from the company or from another shareholder as primary or secondary market. When the corporation produce shares, it does so because for the return of the money.

Companies can increase their money through borrowing. They usually do this either by directly taking loan from a bank, or by delivering debt, usually called as bonds. Bonds are basically different from stocks in a different of ways. Firstly, bondholders are creditors to the business. They are allowed to interest as well as refund of principal. Creditors are given legal priority over other stakeholders in the case of an economic failure. They will be made first if a company is forced to sell properties in order to refund them. Shareholders are last in line and often receive nothing. They usually receive in pennies on the dollar, in the case of economic failure. This indicates that stocks are naturally riskier investments that bonds.

Bondholders are only allowed to receive the return given by the interest rate. The shareholders can enjoy returns made by increasing profits. The greater risk credited to stocks has normally given by the market. Stocks returned around 8-10% annually and bonds return 5-7%.

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