You may have heard it’s a good thing to buy stocks, to invest in stocks, etc, but you may be new to the financial markets completely and you may be wondering what they are. Perhaps you are someone who has worked your whole life in a manual job and you have never had any dealings with the financial markets or business. Perhaps you have been a stay at home mum and you now want to understand how to look after your wealth and your finances for yourself? You have come to the right place. Let me help you understand, what are stocks…
What are stocks? The basics
In a nutshell, a stock is a share of a company. When answering the question, what are stocks, you should think of the answer like a literal slice of pie:
The pie – the whole pie, is a company/business and buy purchasing a ‘share’ you will literally own a fraction of the business. Stocks have particular ‘control’ rights when it comes to running the business. Since you would partly own the business by owning a share, you would have the right to control what goes on in the business. This is handled by shareholder meeting and votes. Note that some shares do not attract voting or control rights. You need to pay attention to the ‘class’ of shares which you are buying and what rights are attached to them. When answering the question what are stocks, therefore, we must note that different stocks have different benefits and rights attached to them.
What other benefits come from owing a stock?
Since you own a part of a business when you purchase a stock, you are also entitled to receive income from the business (insofar as its profitable). You may receive income as ‘dividends’, or you can wait for your stock to accumulate in capital value. Over time, the business will ‘hopefully’ grow, and this will mean that your share will be worth more, later. What do we mean by ‘grow’? The business will be striving to make profit and that profit can be reinvested into new technologies, so that the business can sell more product. Note that if a company distributes a lot of its profits by way of dividends, then you are likely to get less capital growth in that particular shareholding. You can buy stocks which are good for capital growth (i.e. the directors typically decide to reinvest the profits into making the business grow and become more profitable), or you can buy stocks where the directors are usually paying a good chunk of the profits earned, out to shareholders in the form of dividends. You can tailor your stock portfolio to hold some of each!
I would like to refer you to my other article on dividends and how these can affect the share price of a company, which you may find helpful:
I hope this article helped you to understand the answer to the question, ‘what is a stock?’.
Disclaimer!
Nothing on this blog should be taken as financial advice or encouragement for you to enter a trade. You are expected to speak to a financial adviser or carry out your own due diligence before entering any positions. Everything on this blog is made for educational purposes and to equip you with the knowledge you need to be able to make your own financial decisions.
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