On the surface, a stock is rather simple. It is a share of ownership in a company. When you buy a stock (whether common stock or preferred stock), because you own that stock you own part of the company.
Types of Stock
As usual, the old saying that the devil is in the details holds true in this case as well. If you are going to own stocks in any way it is helpful to have at least a general grasp of the specifics.
- Common stock generally comes with voting rights and an opportunity to participate in corporate decisions. But not all stocks are common. Besides, even common stocks may have “fine print” that excludes voting rights.
- Preferred stock does not usually offer voting rights but has the advantage of receiving specified dividend payments before other shareholders. Preferred stock may be designated as “convertible” which means they may be exchanged for common shares within a certain time frame.
When you own stock, you are known as a shareholder, or stockholder. While being a shareholder means owning a part of the company, this is not absolute in any way. The company is viewed as a “person” in and of itself.
NOTE:
In other words you cannot use the company car just because you are a partial owner without permission of the company. But neither are you liable personally if the company should go bankrupt.
Caveats About Buying Stock
Now for a couple of those pesky details. Not all stocks are equal. Some companies are growing and making profits while others are not going to pay anything in either dividends or capital gains distributions (the two ways profits are allocated to stockholders).
Of more importance, stocks may be issued by companies that are solidly controlled by a few individuals (or even one person) and they may be paying themselves directly or indirectly without distributing much if anything to the stockholders!
I shouldn’t need to spell it out but I will. This is clearly one of the places where you need to keep in mind the old saying, “Let the buyer beware.” Or, in a more positive way, do your research before you buy any individual stock.
This in no way means that stocks are not a good investment. In fact, over time this can be a good way to make money, especially passive income which is one of our priorities.
How to Buy Stock
While there are many ways to purchase stocks, most individual stock purchases (both common stock and preferred stock) are made through a “stock broker”, either a full service broker who offers advice and charges a higher fee or discount brokers who charge a smaller fee.
Most stocks, however, are purchased as shares in a mutual fund. These may be purchased through brokers in the same way as individual stocks, but are often purchased directly from mutual fund companies (most often with the advantage of saving significant fees).
While I recommend mutual funds, primarily total stock market index funds and the Standard and Poor's 500 index funds for stock investments, it is good to know about individual stocks. It can be fun and educational to follow the stock market from day to day and see how markets change the value of stocks.
Learn About Stocks
For more information check out Investopedia (A Forbes Digital Company) for a nine part series of articles on Stock Basics.
This article on stocks is just enough to give you a brief introduction, primarily to basic common stock and preferred stock. This is an important topic so you will want to learn more about stocks.
