What Is a Stock?

A stock is a security that gives stockholders a share of ownership in a company. Companies typically sell shares to gain money to grow the business.

A company’s stock is first sold at the initial public offering (IPO). After that, stockholders can resell their shares on the stock market. Because a company’s expected earnings typically drive its stock prices, the prices can rise or fall.

Types of Stocks

The types of stock include:

• Common stock: Common stock entitles owners to vote at shareholder meetings and receive dividends.

• Preferred stock: Preferred stockholders typically don’t have voting rights. However, they receive dividend payments before common stockholders do, and have priority over common stockholders if the company goes bankrupt and its assets are liquidated.

• Growth stock: Growth stock has earnings growing at a faster rate than the market average. The stock rarely pays dividends, and investors buy it in the hope of capital appreciation.  

• Income stock: Income stock consistently pays dividends, which are a portion of the company’s earnings paid to shareholders. Investors buy the stock for the income they generate.  

• Value stock: Value stock has a low price-to-earnings (PE) ratio, meaning it is less expensive to purchase than a stock with a higher PE ratio. A value stock might be a growth or income stock, and its low PE ratio may reflect that it has fallen out of favor with investors. People buy value stocks in the hope that the market has overreacted and that the stock’s price will rebound.

• Blue-chip stock: Blue-chip stock is a share in a large, well-known company with a solid history of growth. The stock generally pays dividends.

Benefits of Investing in Stocks

The benefits of investing in stocks include:

• Potential capital gains from owning a stock that grows in value over time.

• Potential income from dividends paid by the company.

• Lower tax rates on long-term capital gains.

Potential Risks of Stocks

The potential risks of investing in stocks include:

• Share prices for a company falling, even to zero.

• If the company goes broke, you could be the last to be paid, and you might not get your money back.

• The value of your shares will go up and down.

• The dividend can vary.

How to Purchase Stocks

The following are the most common ways to buy stocks:

• Direct stock plans through companies: Some companies allow you to buy or sell their stock through them without using a broker. The companies might limit direct stock plans to their employees or existing shareholders. Some require minimum purchase amounts or account levels.

• Dividend reinvestment plans: You can purchase more shares of a stock you own by signing an agreement with the company to reinvest dividend payments into the company. Check with the company or your brokerage firm to see if you will be charged for this service.

• Discount or full-service broker: Brokers buy and sell shares for customers for a commission. Many brokers run websites where you can buy stocks.

• Stock funds: Mutual funds that invest primarily in stocks. Investment companies offer the funds, which can be purchased directly from the companies or through a broker or adviser.

Work With a Licensed Financial Professional  

Consider working with a licensed financial professional to purchase registered products. You might want to ask the following questions about the investment and professional selling the investment:

1. Is the investment registered?

2. Have investors complained about the investment in the past?

3. Have the people who own or manage the investment been in trouble?

4. Is the person selling the investment licensed in my state?

5. Has the person selling the investment been in trouble with the state?

*This information is for educational purposes only.

Do you own or plan to purchase a stock? Let me know in the comments!