Stocks are one of the most common types of investments. Today, they are more accessible to a greater portion of the public than ever before. In this article, we’ll take a brief look at stocks, including what they are and how they can affect your investment portfolio.
According to Investopedia, a stock is “a security that represents the ownership of a fraction of a corporation. This entitles the owner of the stock to a proportion of the corporation’s assets and profits equal to how much stock they own.” In very simplistic terms, stock represents your piece of the pie.
Stock can also be referred to as “equity” while a unit of stock is known as a “share.”
What is a stock?
There are two main types of stocks: common and preferred.
Common stock means that the person who owns it is entitled to receive dividends and vote in shareholder meetings. A preferred stock means the owner isn’t able to vote in shareholder meetings; however, they often receive a higher claim on earnings and receive dividends before common stockholders. They also have higher priority if the company claims bankruptcy.
For many, stocks are oftentimes the groundwork of their financial portfolios. This is because stocks are readily accessible and there’s a vast array of options. They also have some of the highest rates for a potential return compared to other investment opportunities.
How much a stock is worth depends on a number of factors, including announcements made by the company, changes by the company, announcements and changes from others in the industry, etc. It can also be affected by events or news of events happening around the world.
How do stocks affect my portfolio?
The dividends you receive depend on the earnings and strategies of the firm. While some stocks will pay you dividends, other companies take the earnings and invest them back into the company. If you decide to invest in stocks, it may be a good idea to select shares from various corporations and industries so you're not putting all of your eggs in one basket. For example, if there is a downturn in a given company or industry, you could be better protected from potential losses by having your stocks diversified across different corporations and industries. It is also important to remember that by purchasing stocks, you have the potential to lose your entire investment if a company goes out of business.