Stocks are all the stocks in which ownership of a company is shared. In common terminology, the stocks are collectively referred to as ‘stock’. Each share of stock represents a fractional share of the overall stock. The term ‘share’ is often used in place of ‘stock’. However, it has been noticed that when an issue of stock is brought up for the issue at a meeting of shareholders, most of them refer to ‘stock’ as well. There are different classes of stocks available, namely, common stock, preferred stock, dematerialized share and treasury stock.
The importance of owning stocks comes mainly because they allow the investors to reap profits from the business activity of another company without having to involve themselves in that business directly. For instance, let us take an investor who owns 10 million shares of stock in a manufacturing company. These stocks will be beneficial to him, as he can earn high dividends. These dividends can be used for paying off debts or capitalizing new ventures. But, many investors neglect to recognize that they also need to contribute towards their children’s education, or buy a home for their spouse. So, one should invest in stocks and not forget the other necessities of life!
Stocks are grouped into two general categories – common stocks and preferred stocks. Common stocks are those in which the dividend is regularly received by the shareholders. On the other hand, preferred stocks are the stocks in which the dividends are only paid occasionally, or at particular times. Both of these types of stocks can be easily raised funds for their further growth.
An important thing to be kept in mind while dealing in stocks is that the stocks represent ownership in a business, and not actual ownership. For example, a shareholder will buy shares of a company, but does not actually own a share in the said company. The same holds true for the bonds, shares, mortgage, etc. Therefore, one should never get too carried away with the notion of having “stocks represent ownership”, because in reality, it is not the stocks that are being bought, but the ownership rights that are being conveyed!
You can raise capital for different purposes through different means. For instance, you can buy bonds, shares, etc. from the secondary market. Secondary market has a variety of stocks and bonds to choose from at competitive prices. However, you must know that whatever is issued by the company will be listed on the secondary market; so, when you buy stocks, you do not actually own a share in the company, but you still have the right to vote!
Stocks can also be traded directly through brokers or through companies themselves. When trading stocks directly, you are not allowed to have a direct influence on the profits of the company. The profits are given to you in the form of commissions, which the broker or company pays you. However, when trading bonds or mutual funds through a broker, you would actually have an indirect and positive impact on the profits.