Stocks: What They Are, Main Types, How They Differ From Bonds

What Are Stocks?

• Definition: A stock (equity) represents ownership of a fraction of a corporation.
• Shares: Units of stock that entitle the owner to a proportion of the corporation's assets and profits.
• Stock Exchanges: Stocks are bought and sold, mainly on stock exchanges; they are the foundation of many individual portfolios.
• Regulations: Stock trades adhere to government regulations to protect investors from fraud.

Key Takeaways

• Ownership: Holding stock indicates proportionate ownership in a corporation.
• Purpose of Issuance: Corporations issue stock to raise funds for business operations.
• Types: Main types include common and preferred stock.
• Performance: Historically, stocks have outperformed most other investments over the long term.

Understanding Stocks

• Shareholder: An owner of stock in a company, with a claim to some company assets and earnings.
• Legal Structure: Corporations are treated as legal persons, meaning corporate property is separate from shareholder assets.
• Liability: Shareholder liability is limited; personal assets are not at risk in corporate bankruptcy.
• Ownership and Control: Shareholders own shares but not the corporation's assets. Major shareholders can influence company direction.

Stockholder Rights

• Voting: Shareholders may vote in meetings.
• Dividends: Entitled to dividends when distributed.
• Transfer: Right to sell shares.
• Board of Directors: Major shareholders can influence board appointments.

Types of Stock

Common Stock

• Rights: Voting at shareholder meetings and receiving dividends.
• Example: First issued by the Dutch East India Company in 1602.

Preferred Stock

• Rights: Generally no voting rights but higher claim on assets and dividends than common shareholders.

Stocks vs. Bonds

• Stocks: Represent equity, ownership in a company.
• Bonds: Creditors to the corporation, entitled to interest and principal repayment.
  • In bankruptcy, bondholders are prioritized over shareholders.
• Risk: Stocks are riskier than bonds, as shareholders might receive nothing in bankruptcy.

Trading Stocks

• Stock Exchanges: E.g., Nasdaq, NYSE.
• Initial Public Offerings (IPOs): When a company first goes public.
• Brokerage Accounts: Used to purchase stock on exchanges.
• Price Influencers: Supply and demand, among other factors.

Earning Income from Stocks

• Dividends: Cash distributions of company profits.
• Capital Appreciation: Increase in share price itself.

Risk in Stock Ownership

• Investment Risk: Stocks, bonds, mutual funds, ETFs may lose value due to market conditions.
• Decision Impact: Corporate decisions can affect an investment's value.
• Long-term Performance: Stocks generally outperform other investments over time.

Conclusion

• Nature of Stocks: Represents fractional ownership in a corporation, different from bonds which are more akin to loans.
• Purpose of Issuance: Companies issue stock to raise capital for projects or expansion.
• Types and Rights: Different stock types confer different rights and benefits to shareholders.