Stocks represent ownership in a company and are one of the most common ways for individuals to invest in the financial markets. Let’s break this down further.
Types of Stocks:
- Common Stocks:
- Ownership Rights: Common stockholders own a portion of the company and have voting rights on corporate matters, such as electing the board of directors or approving major decisions like mergers.
- Dividends: While common stocks may pay dividends, these are not guaranteed and depend on the company’s profitability and board decisions.
- Capital Appreciation: The primary way common stockholders earn returns is through increases in the stock’s price.
- Example: If you own common stock in Tesla, you can vote at shareholder meetings and benefit if Tesla’s stock price rises.
- Preferred Stocks:
- Priority Dividends: Preferred stockholders receive dividends before common stockholders, often at a fixed rate.
- No Voting Rights: Typically, preferred shareholders do not have voting rights, but they have a higher claim on assets in the event of liquidation.
- Hybrid Nature: Preferred stocks combine features of both stocks and bonds, offering fixed income like bonds but with potential for price appreciation.
- Example: A preferred stock in Coca-Cola might pay a 5% annual dividend, providing steady income regardless of the company’s performance.
How Stocks Are Traded:
- Primary Market: This is where companies issue new shares through Initial Public Offerings (IPOs) or secondary offerings. The proceeds from these sales go directly to the company.
- Example: When Facebook went public in 2012, it raised $16 billion by selling shares in the primary market.
- Secondary Market: This is where investors trade shares among themselves on stock exchanges like the NYSE or NASDAQ. The company does not directly benefit from these trades.
- Example: If you buy shares of Apple on the NASDAQ, you’re purchasing them from another investor, not from Apple itself.
Why Companies Issue Stocks:
- Raising Capital: Companies issue stocks to raise funds for expansion, research, or paying off debt.
- Liquidity for Early Investors: Founders and early investors can sell their shares on the public market to realize gains.
- Example: Amazon’s IPO in 1997 raised $54 million, which helped fund its transformation from an online bookstore to a global e-commerce giant.
Key Metrics to Understand:
- Market Capitalization: This is the total value of a company’s outstanding shares, calculated as share price multiplied by the number of shares.
- Example: If a company has 10 million shares priced at 50each,itsmarketcapis50each,itsmarketcapis500 million.
- Share Price: The current price of a single share, determined by supply and demand in the market.
- Example: If Google’s stock is trading at $2,800 per share, that reflects investor sentiment about the company’s future prospects.
- Dividend Yield: This measures the annual dividend payment relative to the stock price.
- Example: A stock paying 4annuallywithapriceof4annuallywithapriceof100 has a 4% dividend yield.
