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Stock Investment: The Basics

You have decided to invest on the stock market, but do you really know how things work in it?

To understand the stock market, first you need to understand stocks. Stock is the capital raised by a corporation, through the issuance and distribution of shares. A share of stock is the smallest unit of ownership in a company. If you own a share of a company’s stock, you are a part owner of the company. The owners of a business may want additional capital to invest in new projects within the company, or raise money to finance expansion, pay off debt, and provide operating capital. By selling shares they can sell part or all of the company to many part owners. The purchase of one share entitles the owner of that share to literally share in the ownership of the company, and have a fraction of the decision-making power. Stock ownership generally gives you the right to vote on management issues. If the company distributes profits to shareholders, you will likely receive a proportionate share.

The goal of company executives and management is to increase the value of their shareholder’s wealth. If the shareholders are not satisfied with the performance of the company, they can vote for a change in management.

Is there a risk of losing your stock invested money? Yes there is, but the worse that can happen is your stock becomes worthless. The creditors can’t come after your personal assets, like in other situations. That’s not always true in private-held companies like partnerships. Factors that could affect the value of your stocks are: business conditions, increases in profits, litigations or new patents, government actions, such as taxes or changes in the trade policies or general conditions in the global economy, for example, changes in foreign exchange rates, tariffs or diplomatic relations can cause stocks to go up or down.

There are two types of stock: Common stock and Preferred stock. Most of the stock held by individuals is common stock. Preferred stock has priority over common stock in the distribution of dividends and assets, and sometimes has enhanced voting rights such as the ability to veto mergers or acquisitions or the right of first refusal when new shares are issued. A benefit of common stocks is that they are highly liquid for the most part. Small companies may not trade frequently, but most of the larger companies trade daily creating an opportunity to buy or sell shares.

Investing in stocks requires patience, except if you’re a day trader, which is another story. As long as you observe the market signals and stay informed, you can be successful.