Understanding the Importance of Stocks

July 30, 2011

A stock is a small share that represents a partial ownership of a company. Stocks are issued by companies in order to raise capitals and are bought by investors in order to acquire a portion of the company. Even a small share of the company will give the investors the right to have a say in how the company is run. Although they gain a portion of the company’s profits, investors do not carry an obligation to the company in cases of defaults or lawsuits.

Stocks are issued by companies to raise capital. A cash injection is needed for either property acquisition or company expansion. Every stock is limited to a particular number of shares. The growth potential and perceived health of the company influences the market adjustment of the par value of the stocks.

Investors buy stocks with the belief that the company will grow continuously to raise the value of their shares. Acquiring stocks from a new company is considered to be more risky than buying shares from a well-established company but the potential gain is much greater. People who invested in Microsoft shares gained a lot of profit due to the exponential rise of the company.

Only those companies which are listed on public exchanges like the New York Stock Exchange (NYSE) or the National Association of Securities Dealers Automated Quotation System (NASDAQ) are capable of stock trading. The shares from the companies listed on public exchanges can be bought and sold on the open market. Buying a partial ownership in smaller companies that are not listed on a stock exchange is also possible but that is a very different type of investment.

An individual investor hires a broker to make transactions for him. A broker takes specific orders from the investor regarding the buying or the selling of stocks. These orders may include some specific instructions to trade at a price that the market will bear or at a price that the investor will prefer. The broker then tries to execute the investor’s orders by searching for either a buyer or a seller. The broker receives a commission on the sale.

Stocks have a lot of advantages over savings investments because they represent ownerships in a particular company. This gives the investor a certain right to participate in making decisions for the company. Some important company matters require voting and one stock is equivalent to a single vote. Partial company ownership also allows the stockholders to benefit from the company’s profits which are distributed in the form of dividends. These may be issued one or twice a year at the discretion of the company directors.

A prospering company causes the value of the stocks and the profits to increase while a suffering company causes the value of the stocks and the profits to decrease. Stocks, when compared with savings investments, both carry a higher risk of losing money and a higher potential of earning money. A good knowledge of the different stock markets and the various investment strategies can help investors to minimize their losses.

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