What is a stock?
A stock (also called a share) is basically a type of security that represents a piece of ownership in a company. When you buy a stock, you are entitled to a small fraction of the assets and earnings of that company.
There are 2 types of stocks based on ownership rights. The first one is the common stock which entitles the owner voting rights equal to the shares owned. It gives the owner a chance to partake in the major decision making of the company. The other type of stock is called preferred stock. It is a type of ownership with a higher claim on the company’s assets and earnings than a common stock. Although it usually does not carry the same voting rights, owners of preferred stocks are usually guaranteed with a fixed dividend, which must be paid out before distributing it to the common stockholders.
To determine the price of a stock, the company first initializes an IPO or an Initial Public Offering which sets the price of the stocks based on the estimated worth of the company and how many shares it wants to issue. The company does this in order to raise money, which the owners use to pay off the loan used to build it.
The stock market
Investors continue to buy and sell stocks through an exchange called the “stock market”, although the company itself no longer receives money from this. The only time the company receives money through its stocks is from the IPO. The traders continue this kind of transaction because the perceived value of the company changes over time. Investors determine this value depending on the current trend of the market or how well the company does.
The price of a stock in the stock market can be determined in many ways. One of the most common ways is through an auction process where buyers and sellers place bids and offers for a stock. The bid is the price at which somebody is willing to buy a stock while the offer (also called ask) is the price at which somebody is willing to sell a stock. When both parties come to an agreement, a trade is made.
Understanding the market trend
The market trend tends to have fluctuations, occasionally rising or dropping for a long time, thus giving birth to bull and bear markets. Whatever is the status of the trend results to gains or losses of profits to investors. The problem is the market trend is hard to predict due to the numerous factors that affect it. The challenge is how the investors would take advantage of this trend to put it in their favor. The main goal of buying stocks is to make money on companies that are expected to do well.
Earning profits through the stock market
There are many ways to earn profit through the stock market. One is through dividends. A dividend is a cut of the company’s profit that is shared to its stockholders in order to give them a return of investment. Only a few companies do this as most of them opt to issue growth stocks. These stocks are where the company’s profits are reinvested to equipment, renovations, and expansions which could make the company’s value grow.
If not through dividends, the idea of the stock market is to “buy low and sell high”. Investors usually enter the market when stocks have low prices or in a downward trend, in hopes for it to make a snap back. When the stock value rises, most traders sell their owned stocks when they reach a speculated peak to earn profit from the difference of the stock value when bought and when it is sold.
Interested to try stocks trading? Read here about the steps to making money through online trading.
As an investor, you have the choice on how you would manipulate the stocks for your benefit. Whichever way you prefer, the main goal here is to gain profit. There are dozens of companies that are authorized to trade with major stock exchanges. Even if you are far away from these companies, you can always use the power of the internet. Nowadays, it has revolutionized stock trading, giving anyone with an online trading account a power to join in stock exchanges.
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