Understanding Stocks

Stocks have become a common form of investment for many people especially for those preparing to retire. But a lot still may not understand it quite fully. That can be a problem since it takes a good understanding of how stocks work in order to profit from it as an investment opportunity. Here is a basic understanding of what stocks are.

Basic Definition

In business or finance, stock is a unit or share of ownership on a certain company. The term "share" is sometimes used in place of the word stock. A stock is the smallest unit that one can assume in a certain company. Once you own a unit of stock, you have that equivalent share of ownership in a company. Owners of stocks are commonly known as stockholders or shareholders.

Types of Stocks

There are two basic types of stocks- the common and the preferred stock. Their differences stem from the type or level of ownership they hold in a certain company. Common stocks are usually those types of stocks that are offered and held by a majority of the investing public. Such stocks hold with it voting rights on certain issues relating to the operation of the company. Common stocks also have the right of share to dividends on the company profits.

The preferred stock has fewer rights as compared to common stocks. Owners of preferred stock generally do not carry with them voting rights that are afforded to owners of common stocks. But a common advantage that such stocks have over common stocks is that they are legally entitled to a certain dividend level and are paid before such dividends are issued to common stockholders. They also get the priority of being paid out in terms of assets in case the company declares bankruptcy.

Liquidity

Another benefit that common stocks may have over preferred stocks is that they are considered as more liquid than preferred stocks. Common stocks are those being traded in various stock markets and can be bought and sold at any time the markets are open. Some preferred stocks are sometimes given the option of being converted into common stocks, usually at a predetermined period. These are called "convertible preferred shares".

 

Posted by Ardent Editor on Mar 18 2009 in Investment

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