What are stocks?

Stockholders are given a portion of ownership in a company through stocks, which are also referred to as "equities.

Why do people buy stocks?

There are several reasons why investors may purchase stocks, some of which include:

• the potential for the stock to increase in value (capital appreciation)
• receiving regular income in the form of dividends, which are a portion of the company's profits distributed to shareholders
• having a say in the company's decision-making process through voting rights on shareholder proposals.

Why do companies issue stock?

Companies may issue stock in order to raise funds for various purposes, such as:

• paying off outstanding debts
• introducing new products or services
• expanding into new markets or regions
• financing the construction or expansion of facilities.

What kinds of stocks are there?

There are two primary types of stocks: common stock and preferred stock.

Holders of common stock typically have voting rights at shareholders' meetings and are eligible to receive dividends.

While holders of preferred stock generally do not have voting rights, they typically receive dividends before common stockholders, and have precedence over common stockholders in the distribution of assets if the company goes bankrupt and is liquidated.

Common and preferred stocks may belong to one or more of the following categories:

• Growth stocks are those whose earnings are growing at a rate faster than the market average. These stocks usually don't pay dividends, and investors buy them with the expectation of capital appreciation. A start-up technology company is likely to be considered a growth stock.
• Income stocks are known for consistently paying dividends. They are often bought by investors seeking a steady income. A well-established utility company is an example of an income stock.
• Value stocks are characterized by having a low price-to-earnings (PE) ratio, making them relatively cheaper to purchase than stocks with higher PE. These stocks can be either growth or income stocks, and their low PE ratio may reflect the fact that they've fallen out of favor with investors for some reason. Investors buy value stocks with the hope that the market has overreacted and that the stock's price will rebound.
• Blue-chip stocks refer to shares of large, well-known companies with a strong history of growth. They generally pay dividends and considered as a safer investment.

Another way to classify stocks is based on the size of the company, as represented by its market capitalization. These categories include large-cap, mid-cap, and small-cap stocks. Shares of extremely small companies are sometimes referred to as "microcap" stocks. The stocks that are priced the lowest are known as "penny stocks." These companies may have little or no profits. Penny stocks do not offer dividends and are considered highly speculative investments.

What are the benefits and risks of stocks?

Over the long-term, stocks offer investors the greatest potential for growth (capital appreciation) as compared to other investments. Historically, those who have held onto stocks for extended periods of time, such as 15 years or more, have often seen strong, positive returns. However, it is worth noting that stock prices fluctuate, and there is no certainty that a company's stock will perform well. As such, there is a risk of losing money when investing in stocks.

In the event of a company's bankruptcy and liquidation of its assets, the distribution of proceeds follows a specific order of priority. Bondholders will be the first to receive payment, followed by holders of preferred stock. Common stockholders will only be able to share in the remaining proceeds, if any are left. As common stockholder is the last in priority order among the creditors, this means in the worst case scenario, common stockholders may receive nothing.

Stock prices can fluctuate, whether or not a company is facing financial difficulties. Historically, the stock prices of large companies, as a group, have experienced a loss on average about once every three years. This means, if an investor needs to sell their shares during a period when the stock price is lower than what they paid for it, they will incur a loss on the sale.

Market volatility can cause concern for some investors as the value of a stock can fluctuate. The stock's price can be impacted by internal factors within the company, such as a problem with a product, or external factors that the company has no control over, such as political or economic events.

Investing in a diversified portfolio of stocks can help to offset some of the risks associated with stock ownership. Additionally, investing in assets other than stocks, such as bonds, can also serve as a form of risk management by providing a balance to the overall portfolio.

How to buy and sell stocks

There are several ways to acquire and dispose of stocks, including:

• Direct Stock Plan: Allows individual investors to purchase stocks directly from the issuing company
• Dividend Reinvestment Plan: An investment plan in which dividends are automatically used to buy additional shares of the same stock
• Discount or Full-service Brokers: Professionals or firms that buy and sell stocks on behalf of clients
• Stock Funds: A type of investment vehicle that pools money from multiple investors to purchase a diversified portfolio of stocks.

Direct Stock Plan

Direct stock plans allow investors to buy or sell shares directly with a company, bypassing the use of a broker, which can save on commission costs. However, other fees associated with the plan may apply, such as when transferring shares to a broker to sell them. Direct stock plans are not available to everyone, some companies restrict them to employees or existing shareholders and may also have minimum investment requirements or account levels.

With direct stock plans, shares are not purchased or sold at a specific market price or at a specific time. Instead, the company will buy or sell shares for the plan at scheduled intervals, such as daily, weekly, or monthly, and at the average market price. Some plans also offer automation options, allowing investors to set up automatic purchases and have the cost deducted from a savings account.

Dividend Reinvestment Plans

Dividend Reinvestment Plans (DRIPs) offer an option for shareholders to automatically reinvest dividends in more shares of the same stock they already own. These plans generally require a shareholder to sign an agreement with the company, and it is important to check with the company or the brokerage firm as some may charge fees for this service.

Discount or Full-service Brokers

Discount or Full-service Brokers are professional or firms that acts as intermediaries between buyers and sellers of stocks, for a fee, known as a commission. They buy and sell shares on behalf of their clients.

Stock Funds

Stock Funds are a type of investment vehicle, which pools money from multiple investors to purchase a diversified portfolio of stocks, similar to a mutual fund. Different stock funds may have different investment objectives and strategies, and thus may have different concentration on types of stocks such as blue-chip, large-cap value stocks, or mid-cap growth stocks. These funds are typically offered by investment companies.

Stock fees

When buying and selling stocks, various fees can be incurred. Direct stock plans or dividend reinvestment plans may charge a fee for their services, while brokers that execute trades on behalf of the investor will charge a commission. Discount brokers typically charge lower commissions than full-service brokerages, but generally do not provide investment advice or research. Conversely, full-service brokerages have higher commissions, but the added cost goes towards providing investment advice and research based on the firm's findings.