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.
|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