What Are Stocks and How Do They Work?
If you are interested in this matter and would like to know more about the world of stocks and their functioning, you can do so by reading this article, which provides some valuable insights on this topic.
What are stocks?
Based on the definition of stocks provided in the introduction, stocks work in a way in which individuals purchase and thereby own units of stocks, which are normally called “shares.” These shares often entitle the owners to a proportion of the corporation’s assets and profits, normally equal to the amount of stocks owned.
People sell and buy stocks on stock exchanges, which are the foundation of many investors' portfolios. When asking the question, “What are stocks?”, it might be helpful to understand that there are two main types of stocks: common and preferred.
Common stocks normally entitle the owner to vote at shareholder meetings and receive any dividends paid out by the corporation. Preferred stocks do not give any voting rights but stakeholders might have higher claims on assets and earnings when compared to common stakeholders. Shareholders who own preferred stocks will receive dividends before common shareholders and have priority if a company goes bankrupt and is liquidated.
Stocks are often issued by corporations in order to raise funds to operate their businesses. Anyone who buys a stock therefore has a claim to a part of not only the company’s assets but also their earnings.
How do stocks work?
Stocks make you a shareholder, which means that you have a stake in the ownership of a specific company. Due to this, the more shares you own, the larger your ownership is. A stock’s value is determined by supply and demand in the stock market. This way, if a significant number of investors want to purchase a particular stock, its price will rise even more dramatically. In the same way, if many investors decide to sell them, their prices will decrease, even sometimes by a large margin.
Final Thoughts
When investing in stocks, you will have to consider some inherent risks due to the fact that stocks are influenced by deep price variations. It is, therefore, essential to remain informed about the market and to continue gaining knowledge on the topic of stocks.
Images: Nicholas Cappello
