With rising inflation and soaring prices, it becomes difficult for an individual to sustain the existing lifestyle with each passing year. It is important to invest or look for alternate sources of income in order to lead a comfortable life and secure your future financially. One of the most sought after investments is the stock market, as it provides lucrative returns.
Although investment in stocks is risky in nature, it turns out to be profitable if the investment decisions are made with due diligence. If you are new to the stock market, it is important to understand the basics, types of stocks, how stock market works, and the do’s and don’ts of stock market. Below information would be an apt guide to start investing in the stock market.
What are Stocks?
A stock is a type of security that depicts the state of ownership in a corporation and also signifies the claim on the respective part of corporation’s earnings and assets. Stocks are often termed as equities as they represent equity (ownership) in the business.
Types of Stocks
There are two types of stocks:
Common Stocks: Common Stocks are the ones where shareholders are entitled to their proportionate share of corporation’s profits or losses. Shareholders have the right to elect Board of Directors, which represent them and decide how the profits would be utilized, whether in the form of reinvestment or sharing a part of it with the shareholders in the form of dividends.
Preferred stocks: Preferred stocks are the ones where shareholders receive a specific dividend at predefined intervals. The dividend paid to shareholders of the preferred stocks are generally before the dividends are paid to the shareholders of common stocks. In a case when the corporation goes bankrupt, shareholders of the preferred stocks are favored vis-à-vis shareholders of common stocks for reoccupying their investment from sales and recoveries received by the bankruptcy trustee.
How do the stocks work?
In a corporation, if the ownership is divided into 1,000 parts, the profits and losses will also be divided into 1,000 parts. It can later be decided whether these profits are to be reinvested in the business or a part of them is to be shared among the shareholders. If at some point, any of the owner decides to sell his share of ownership, and the company is very large, it can come out with an IPO (Initial Public Offering) where the ownership shares are sold to public directly in the primary market. After the process of IPO is complete, the shares are listed on the stock exchanges, from where people can buy and sell shares. The price fluctuation of these stocks depend on the demand and supply method. It also varies depending on the company’s management, growth and future prospects.