WHAT ARE STOCKS?
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A share of stock represents a tiny share of ownership in a
company. When you buy shares of stock, you are becoming a part-owner in the firm
and are entitled to a share of its assets and earnings. In other words, you are
buying equity in the company. Companies sell stock to raise funds, often
to invest in growing the business.
Depending on the kind of stock you buy, you may also have the
right to vote, along with other shareholders, to elect members to the company's
board of directors and decide other key matters. The most important distinction
about this kind of company ownership is that stocks are a form of equity that is
designed to be traded—bought and sold.
Unlike buying bonds, which represent loans, or making deposits in
a savings account, holding stock represents actual ownership of equity. The
other important difference is that the return on common stock is not fixed, but
varies with the performance of the company.
There are two ways to make money with stocks.
stocks pay dividends, or shares of the companies' profits that
shareholders receive as income.
? You can also make money off fluctuations in the stock's
market value, if you can sell it at a higher price than you paid for it.
But not all stocks are alike. Let's look at two basic
classes of stock.