A stock (also known as an equity) is a security that represents the ownership of a portion of a corporation. As a result, in proportion to the number of shares they own, stockholders are entitled to a piece of the corporation's assets and profits. Units of stock are called "shares."
Why do people buy stocks?
Here are few reasons:
- When a stock's price increases, there is a capital growth.
- Dividend payments are made when a corporation gives stockholders a portion of its earnings.
- Ability to influence the company and vote on shares
Why do companies issue stocks?
Companies sell stock to raise funds for a range of purposes, which may include:
- Settling debt
- Introducing new goods
- Developing in new markets or areas
- Developing new facilities or expanding existing ones
Types of stocks
Common Stock
It frequently falls under this category if you own stock in a corporation. Voting rights, which typically equate to one vote per share, are one of the main advantages of common stock. Common stockholders have the right to vote on corporate matters like stock splits, board elections, and overall company strategy during annual general meetings.
Dividends are commonly paid on common stock, although unlike preferred shares, they are not guaranteed. Instead, the health of the issuing firm determines the value of common stock; if the company is profitable, the stock is worth more, and it can reinvest the proceeds to spur growth. However, because the investor loses money if a company's profits decline, common stock is riskier than preferred shares.
Preferred Stock
Preferred stocks are typically chosen by investors who don't need to cast a vote on business decisions and are looking for a reliable dividend check. Many characteristics of a bond are present in a relationship. For instance, at a predetermined price, the corporation may repurchase preferred stock.
Unlike common stock, which has variable dividends that are never guaranteed, this has no such restriction. Another benefit is that preferred shareholders are paid off before common shareholders in the case of liquidation. Additionally, preferred stock may be callable, giving the business the ability to buy shareholders' shares at any moment for any reason (usually for a premium).
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