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Lesson 1: What are Stocks

Lesson 1: What are Stocks

Stocks are an investment in a company and that company's profits. People invest and trade in stocks to earn a return on their investment.

Stocks are units of ownership in a company, also known as shares of stock or equities. When you buy a share of stock, you’re purchasing a partial ownership stake in a company, entitling you to certain benefits. Understanding what stocks are and how they work is one of the keys to investing since stocks play a central role in building a well-balanced investment portfolio.

What Is a Stock?

A stock is a security that represents an ownership share in a company. When you purchase a company's stock, you're purchasing a small piece of that company, called a share.

Investors purchase stocks in companies they think will go up in value. If that happens, the company's stock increases in value as well. The stock can then be sold for a profit.

For companies, issuing stock is a way to raise money to grow and invest in their business. For investors, stocks are a way to grow their money and outpace inflation over time.

When you buy shares of stock in a company, you gain certain privileges depending on the types of shares you own, including:

  • Voting rights: You may have the right to vote at the company’s annual shareholder meetings.
  • Dividends: You may receive a share of the company’s profits.
  • Capital appreciation: When the company’s stock price goes up, your shares increase in value (and when the price of a stock declines, the value of your shares falls).

While stocks give you an ownership share in a company, owning shares of stock doesn’t mean you’re entitled to a say in the company’s day-to-day operations. Owning stock means you’re trusting the company’s leaders to run the business the way they see fit. If you don’t like the performance of a company, you sell your shares and choose a new home for your investment dollars.

How do stocks work?

Companies sell shares in their business to raise money. They then use that money for various initiatives: A company might use the money raised from a stock offering to fund new products or product lines, invest in growth, expand their operations or pay off debt.

When private companies decide to sell shares of stock to the general public, they conduct an initial public offering (IPO). During an initial public offering, the company and its advisors disclose how many shares of stock will be issued and set an IPO price. Funds raised from the sale of stock during an IPO go directly to the company. Once the offering is complete, the shares of stock are traded on the secondary market—otherwise known as “the stock market”—where the stock’s price rises and falls depending on a wide range of factors.

When you read that a company is “going public,” that means they are conducting an IPO where they make shares available for purchase by investors via public stock markets. If you decide to buy a stock, you’ll often buy it not from the company itself, but from another investor who wants to sell the stock. Likewise, if you want to sell a stock, you’ll sell to another investor who wants to buy.

These trades are handled through a stock exchange, with a broker representing each investor. Many investors these days use online stockbrokers, buying and selling stocks through the broker’s trading platform, which connects them to exchanges. If you don’t have a brokerage account, you’ll need one to buy stocks.

What Are the Different Types of Stock?

Companies issue a variety of different types of stock. Common stock and preferred stock are among the most common varieties, and some companies have different classes of stock. These different types of stock determine voting rights, dividend payments, and your rights for recouping your investment if the company goes into bankruptcy.

Common Stock vs Preferred Stock

When people talk about investing in stocks, they're usually referring to common stocks. These kinds of stocks give you the opportunity to join in the success of public companies, and as such, they're an investment that can really grow your portfolio.

As noted above, buying stocks may give you the right to vote on issues at a company’s annual shareholder meeting.

Each share of common stock typically gives holders a single vote at the company’s annual meeting. However, common stock shareholders are at the end of the line after debt-holders, creditors, and preferred stock shareholders when it comes to recouping their investment should the company go into bankruptcy. Common stock generally entitles you to dividends, however, you are not guaranteed to receive dividend payments. Companies can choose to pay dividends or not pay dividends, depending on their own needs.

Shares of preferred stock typically do not give you any voting rights, although preferred stock generally entitles holders to receive dividend payments before common stockholders. In addition, investors who own shares of preferred stock are ahead of those who own common stock in line for recouping their investment should the company go into bankruptcy.

Common and preferred stocks may fall into one or more of the following categories:

  • Growth stocks have earnings growing at a faster rate than the market average. They rarely pay dividends and investors buy them in the hope of capital appreciation. A start-up technology company is likely to be a growth stock.
  • Income stocks pay dividends consistently. Investors buy them for the income they generate. An established utility company is likely to be an income stock.
  • Value stocks have a low price-to-earnings (PE) ratio, meaning they are cheaper to buy than stocks with a higher PE. Value stocks may be growth or income stocks, and their low PE ratio may reflect the fact that they have fallen out of favor with investors for some reason. People buy value stocks in the hope that the market has overreacted and that the stock’s price will rebound.
  • Blue-chip stocks are shares in large, well-known companies with a solid history of growth. They generally pay dividends.

Another way to categorize stocks is by the size of the company, as shown in its market capitalization. There are large-cap, mid-cap, and small-cap stocks.

Shares in very small companies are sometimes called “microcap” stocks. The very lowest priced stocks are known as “penny stocks.” These companies may have little or no earnings. Penny stocks do not pay dividends and are highly speculative.

Dividend Stocks

Depending on the type of stocks you own, companies may share their profits with you via dividends. Investors receive dividend payments quarterly or annually, with payments allocated based on how many shares of the company’s stock you own. Holders of preferred stock have a priority claim to dividends, ahead of common stock shareholders. Regardless of the type of stock you own, the principles governing dividends are essentially the same.

For example, say a company has positive earnings for the quarter and issues a $0.42 preferred stock dividend. If you own 100 shares of the company’s preferred stock, you’ll receive a cash dividend of $42. Many companies also offer a dividend reinvestment plan that allows you to reinvest your cash dividend payments back into the stock, expanding your holdings and keeping your cash hard at work in your portfolio.

Companies sometimes issue stock dividends. If a company declares a stock dividend of 5% and you hold 100 shares of that company, you’d receive five additional shares of stock, bringing your holdings to 105 shares. However, the value of each outstanding share would decrease by 5%, making the value of your shares the same.

Companies also issue hybrid dividends that are a combination of cash and stock. Hybrid dividends are rare but have been used in the past by companies as a way of sharing profits with their shareholders.

>> Best Dividend Stocks

Benefits of Owning Stocks

There are many potential benefits to owning stocks or shares in a company, including the following:

#1 Claim on assets

A shareholder has a claim on assets of a company it has stock in. However, the claims on assets are relevant only when the company faces liquidation. In that event, all of the company’s assets and liabilities are counted, and after all, creditors are paid, and the shareholders can claim what is left. This is the reason that equity (stocks) investments are considered higher risk than debt (credit, loans, and bonds) because creditors are paid before equity holders, and if there are no assets left after the debt is paid, the equity holders may receive nothing.

#2 Dividends and capital gains

A stockholder may also receive earnings, which are paid in the form of dividends. The company can decide the number of dividends to be paid in one period (such as one quarter or one year), or it can decide to retain all of the earnings to expand the business further. Aside from dividends, the stockholder can also enjoy capital gains from stock price appreciation.

#3 Power to vote

Another powerful feature of stock ownership is that shareholders are entitled to vote for management changes if the company is mismanaged. The executive board of a company will hold annual meetings to report overall company performance. They disclose plans for future period operations and management decisions. Should investors and stockholders disagree with the company’s current operation or future plans, they have the power to negotiate changes in management or business strategy.

#4 Limited liability

Lastly, when a person owns shares of a company, the nature of ownership is limited. Should the company go bankrupt, shareholders are not personally liable for any loss.

Risks of Owning Stock

Along with the benefits of stock ownership, there are also risks that investors have to consider, including:

#1 Loss of capital

There is no guarantee that a stock’s price will move up. An investor may buy shares at $50 during an IPO, but find that the shares move down to $20 as the company begins to perform badly, for example.

#2 No liquidation preference

When a company liquidates, creditors are paid before equity holders. In most cases, a company will only liquidate when it has very few assets left to operate. In most cases, that means that there will be no assets left for equity holders once creditors are paid off.

#3 Irrelevant power to vote

While retail investors technically have voting rights in executive board meetings, in practice they usually have very limited influence or power. The majority shareholder typically determines the outcome of all votes at shareholder meetings.

What Affects Stock Prices?

There are many factors that affect share prices. These may include the global economy, sector performance, government policies, natural disasters, and other factors. Investor sentiment – how investors feel about the company’s future prospects – often plays a large part in dictating the price. If investors are confident about a company’s ability to rapidly grow and eventually produce large returns on investment, then the company’s stock price may be well above its current intrinsic, or actual, value.

Two of the most examined financial ratios used to evaluate stocks are the following:

  • Revenue growth
  • Earnings growth

Revenue growth tells analysts about the sales performance of the company’s products or services and generally indicates whether or not its customers love what it does. Earnings reveal how efficiently the company manages its operations and resources to produce profits. Both are very high-level indicators that can be used as references on whether or not to purchase shares. However, stock analysts also use many other financial ratios and tools to help investors benefit from stock trading.

No matter what your job in the financial industry, you will be involved with stocks in one way or another.

Trading and Investing in Stocks

In the past, shares were represented on a piece of paper as a certificate. When a person wanted to purchase shares, they needed to physically visit the office of a broker and make the transaction there, where they would receive the actual share certificates. Today, physical share certificates are rarely seen. Stockbrokers keep documents electronically, and an investor needs only to click through online trading platforms to trade and invest in shares.

Investing and trading are similar terms that some people will sometimes use interchangeably – but there are important differences for you to be aware of. We’ll go through what each of these terms means in this section.

What is Stock trading?

Trading stocks means that you’re speculating on a share’s price movements with derivatives like CFDs – without taking direct ownership. CFDs are leveraged products, which means that you won’t need to commit to the full value of the position. But, bear in mind that leverage can increase both your profits and your losses.

With CFDs, you can ‘buy’ (go long) the shares if you think the stock’s price will rise, or you can ‘sell’ (go short) if you think the stock’s price will fall. Shorting with derivatives can be an effective way to hedge against downward price movements in your non-leveraged investment portfolio, or it can be a way to generate profits outright from shares that are falling in value. But, when you go short your potential losses are theoretically uncapped because there’s no limit on how high something’s price can rise.

When you create a CFD account with us, you’ll gain access to 0 commission:

  • Individual stock trading - ‘Buy’ (go long) or ‘sell’ (go short) up to 2,000 international shares to speculate on their price rising or falling
  • Fractional, unleveraged stock trading - Trade over 50 famous U.S-listed shares without having to worry about any commissions and rollover fees
  • Thematic trading - gain exposure to the movements of a specific trend or ‘theme’ such as meme stocks, social media stocks, EV stocks, and many other ThematiX
  • Basket trading - take a position on a group of stocks simultaneously, grouped together into one index or ETF.

stock trading capex.com

What is Stock investing

Investors buy shares outright in the hope that they will increase in price and can be sold at a later date for a profit. They uphold the traditional mantra of buying low and selling high – known as going long. Investors will take positions over a longer period of time, attempting to profit from share price changes as well as dividend payments.

While this means that they might need more initial capital to get started when compared to trading, their losses would be capped at this initial outlay. That said, investors should be aware that they might receive back less than they initially invested.

What are the ways to make money in stocks

Stocks carry more risk than some other investments, but also have the potential to reap higher rewards. Stock investors can earn money in three main ways:

  • Sell stock shares at a profit - That is, for a higher price than you paid for them. If the price of a stock goes up during the time they own it, and they sell it for more than they paid for it (buy and hold investing). This is the classic strategy, "buy low, sell high."
  • Short-selling - This strategy is a reverse of the classic one above; it might be dubbed "sell high, buy low." When you sell short, you borrow shares of stock (traditional method), sell them on the open market, and then buy them back later—if and when the price drops. With derivatives, such as CFDs, you haven’t had to borrow shares from a broker – you are simply speculating on the market price rather than taking physical ownership of the asset. Short-selling is a bet that a stock will decline in value.
  • Collecting dividends - Many stocks pay dividends, a distribution of the company's profits per share. Typically issued each quarter, they're an extra reward for shareholders, usually paid in cash but sometimes in additional shares of stock. Not all stocks pay dividends, but those that do typically do so on a quarterly basis.

The ultimate aim of every investor is to make a profit from their stocks, of course. But if the market goes against them they will suffer a loss.

Over the last century, the stock market has posted an average annual return of 10%. The word "average" is important here: Not only is that return an average for the market as a whole — rather than a specific individual stock — but in any given year, the market's return can be lower or higher than 10%.

What are the best-performing international stocks?

These are the best-performing international stocks over the last 10 years. The existence of such big returns makes it look easy to have achieved this, but having a trading edge​​ is required to capture above-average returns. All listings are US-based stocks and the data is taken from Yahoo Finance.

  1. Celsius Holdings stock (CELH): 41,480%
  2. Tesla stock (TSLA): 18,683%
  3. GreenBox stock (GBOX): 13,483%
  4. Repligen stock (RGEN): 8,096%
  5. Patrick Industries stock (PATK): 6,340%
  6. NVIDIA stock (NVDA): 7,563%
  7. Genmab stock (GMAB): 7,105%
  8. Dexcom stock (DXCM): 7,753%
  9. Netflix stock (NFLX): 7,151%
  10. BioLife Solutions stock (BLFS): 10,355%

*Please remember that past performance is not a reliable indicator of future results.

What are the biggest international stocks?

These are the biggest companies listed on public stock exchanges globally and the countries they are listed. As of early November 2021, market capitalization prices are in USD. This is a snapshot that is subject to change.

  1. Microsoft stock (MSFT): $2.53tn (USA)
  2. Apple stock (AAPL): $2.49tn (USA)
  3. Saudi Aramco stock (2222.SR): $2.02tn (Saudi Arabia)
  4. Alphabet stock (GOOGL): $1.95tn (USA)
  5. Amazon stock (AMZN): $1.76tn (USA)
  6. Tesla stock (TSLA): $1.24tn (USA)
  7. Facebook stock (FB): $934.25bn (USA)
  8. NVIDIA stock (NVDA): $742.64bn (USA)
  9. Berkshire Hathaway stock (BRK): $650.99bn (USA)
  10. TSMC stock (TSM) $610.85bn (Taiwan)

What are the most popular international stocks?

These are the most popular international stocks for investors during the last 6 months. This is a snapshot from Ahrefs based on the number of searches on google.

  • Lucid Motors stocks (LCID)
  • NIO stock (NIO)
  • AMC stock (AMC)
  • Wish stock (WISH)
  • Idex stock (IDEX)
  • Cisco stock (CSCO)
  • Boeing stock (BA)
  • Gamestop stock (GME)
  • Xpeng stock (XPEV)
  • Moderna stock (MRNA)

The Bottom Line

A stock represents fractional ownership of equity in an organization. It is different from a bond, which is more like a loan made by creditors to the company in return for periodic payments. A company issues stock to raise capital from investors for new projects or to expand its business operations.

Key things to remember about stocks:

  • Investors who do best over the long term buy and hold. That means they own a diversified portfolio of many stocks and hold on to them through good times and bad.
  • Investing in individual stocks takes time. You should research each stock you purchase, which includes a deep dive into the bones of the company and its financials. Many investors opt to save time by investing in stocks through equity mutual funds, index funds and ETFs instead. These allow you to purchase many stocks in a single transaction, offering instant diversification and reducing the amount of legwork it takes to invest.
  • There are two main types of stocks: common and preferred. Most investors own common stock in a public company. Common stock may pay dividends, but dividends are not guaranteed and the amount of the dividend is not fixed.

Free share trading tools and resources

Before you start trading in shares, you should consider using the educational resources we offer like CAPEX Academy or a demo trading account. CAPEX Academy has lots of courses for you to choose from, and they all tackle a different financial concept or process – like the basics of analyses – to help you to become a better trader.

Our demo account is a great place for you to learn more about leveraged trading, and you’ll be able to get an intimate understanding of how CFDs work – as well as what it’s like to trade with leverage – before risking real capital. For this reason, a demo account with us is a great tool for investors who are looking to make a transition to leveraged trading.

Frequently Asked Questions about Stocks

Why are People Interested in Stocks?

People are interested in stocks just like other financial markets, they can be an opportunity to make money. At a basic level, you can take a position on shares to get exposure to economic growth – and if the health of an economy grows, you might find that companies that are based in that economy also grow.

Company growth is correlated with share price increases, which is what people are hoping for when they buy or invest in shares.

How Do You Buy a Stock?

Most often, stocks are bought and sold on stock exchanges, such as the Nasdaq or the New York Stock Exchange (NYSE). After a company goes public through an initial public offering (IPO), its stock becomes available for investors to buy and sell on an exchange. Typically, investors will use a brokerage account to purchase stock on the exchange, which will list the purchasing price (the bid) or the selling price (the offer). The price of the stock is influenced by supply and demand factors in the market, among other variables.

What Is the Difference Between a Stock and a Bond?

When a company raises capital by issuing stock, it entitles the holder to a share of ownership in the company. By contrast, when a company raises funds for the business by selling bonds, these bonds represent loans from the bondholder to the company. Bonds have terms that require the company or entity to pay back the principal along with interest rates in exchange for this loan. In addition, bondholders are granted priority over stockholders in the event of a bankruptcy, while stockholders typically fall last in line in the claim to assets.

Why Do Companies Issue Stock?

Companies issue stock to raise capital for expanding their business operations or to undertake new projects. Stock issuance in public markets also helps early investors in the company to cash out and profit from their positions in the venture.

This information prepared by za.capex.com is not an offer or a solicitation for the purpose of purchase or sale of any financial products referred to herein or to enter into any legal relations, nor an advice or a recommendation with respect to such financial products.

This information is prepared for general circulation. It does not regard to the specific investment objectives, financial situation or the particular needs of any recipient.

You should independently evaluate each financial product and consider the suitability of such a financial product, by taking into account your specific investment objectives, financial situation or particular needs, and by consulting an independent financial adviser as needed, before dealing in any financial products mentioned in this document.

This information may not be published, circulated, reproduced or distributed in whole or in part to any other person without the Company’s prior written consent. Past performance is not always indicative of likely or future performance. Any views or opinions presented are solely those of the author and do not necessarily represent those of za.capex.com
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