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
|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.
|You get ownership in the company
|You do not get ownership in a company; you only become a creditor or lender to the company
|There is no guarantee of profits, dividends, or capital appreciation
|Principal and interest income is guaranteed and collaterals are maintained against loans.
|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.
|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