What are Stocks?
In simplest terms, Stocks are financial instruments representing ownership in a publicly-traded company. The terms stocks and shares are practically the same and represent ownership in a company. When you own a share, you become a shareholder of a company and are automatically a party to the company’s profits and losses. For example, when you buy 1 share of Reliance Industries, you become entitled to the profits and losses earned by Reliance Industries. Owning a share represents ownership, and you do get voting rights (in proportion to your shares) to decide on key company matters.
Why do companies issue stocks?
Companies issue stocks to:- Launch new products;
- Grow and expand in new markets and countries;
- Pay off their debts (loans);
- Build new factories, offices, etc;
- Buy new equipment.
Why do investors buy stocks?
We are all looking for ways to grow our hard-earned money. Stocks or shares have historically provided the best returns amongst all other asset classes. Investors buy stocks to:- Participate in the growth of the company;
- Earn regular income in the form of dividends;
- Earn bonus shares to increase their shareholdings;
- To acquire voting rights and be a part of key decisions.
What is the stock market?
The stock market is a place where buyers and sellers meet to trade i.e. buy and sell shares of publicly listed companies. The buyers and sellers do not physically meet but trade via a stock exchange like BSE and NSE. Read our detailed article on ‘what is a stock market’.What are the types of stocks?
Companies normally issue two types of stocks:- Common or Equity stocks &
- Preferred stocks
| Parameters | Common Stocks | Preferred Stocks |
| Voting rights | Common shareholders get voting rights | Preferred shareholders do not get any voting rights |
| Claim on dividends | Common shareholders get dividend after preferred shareholders | Preferred shareholders are the first to receive dividends |
| Preference while winding up | Common shareholders are the last to get paid in the event of bankruptcy | Preferred shareholders get paid before common shareholders in the event of bankruptcy. |
| Cost of issue | The cost of issue is high | The cost of issue is low |
What are stocks and bonds?
Stocks and bonds are two completely different asset classes. While owning stocks makes you the owner of a company, a bond merely makes you a creditor or a lender. Let us look at the differences between stocks and bonds.| Parameter | Stocks | Bonds |
| Ownership | You get ownership in the company | You do not get ownership in a company; you only become a creditor or lender to the company |
| Guaranteed Income | There is no guarantee of profits, dividends, or capital appreciation | Principal and interest income is guaranteed and collaterals are maintained against loans. |
| Risk | Stocks are risky as there is no guarantee of returns | Bonds are comparatively less risky as interest and principal repayment is guaranteed |
| Share in the company’s growth | Shareholders can participate in the growth and profits of the company. | Bondholders do not get to participate in the company’s profits or growth. |
| Voting Rights | Shareholders enjoy voting rights | Bondholders do not enjoy any voting privileges. |
| Preference while winding up | Common equity shareholders are the last to be paid in case of bankruptcy. | Bondholders get preferential treatment in the event of bankruptcy. |
| Add on benefits | Shareholders enjoy benefits such as bonus, share splits and can participate in a share buyback | Bondholders do not enjoy any additional benefits apart from the guaranteed return of capital and interest. |
How do stocks work?
Stocks work on the concept of demand and supply in the market.- If more people are selling a stock, the stock price will fall &
- If more people are buying a stock, the stock prices will rise.
How to make money in stocks?
There are two approaches to making money in stocks:- Passive investing
- Active investing
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