A basic understanding of what stocks are and how they work can help you better manage your financial portfolio. With a basic perspective on what stocks mean in the business world, a savvy investor will be more prepared in today’s volatile and ever changing market.
Image via Wikipedia
To begin with, a stock can be thought of as a small piece of company ownership: like owning a deed to the company that is shared with many other people. As a part-owner in the company you have the right to vote on those who run the business, namely the board of directors. And when the company makes a profit you share in that financial gain which is distributed to shareholders in the form of dividends. This amount is equivalent to the percentage of stock you own in the company.
A fortunate protection included as a stock owner is should for some unforeseen reason the company in which you own stock be sued, and lose, you are not liable – regardless of your ownership status. This is referred to as limited liability. You will not have to expensive judgment. However, your stock in the company will probably become worthless.
There two kinds of stock that people generally can own: “Common Stock” and “Preferred Stock.” Common stock is the most common and includes voting rights and a share in dividends.
Preferred stock, on the other hand has a higher rate of return in terms of dividends; however you have fewer controlling rights. Usually those who invest in preferred stock seek out companies making big profits. There is a greater potential for dividends, but the risk is also greater.