What is a Stock?
When trading, one of the main terms that we are used to talking about is «stock ». But what is a stock? Well… in few words, a stock (also called equity) represents a fraction of ownership of a company. When buying a stock, the owner is entitled to a part of the corporations’ assets and profits. These assets and earnings are calculated in relation to how many shares the investor possesses. The unit of a stock is called a “share”.Stocks are some of the most traded financial instruments on the market nowadays, but why is that so? Let’s break it down and see what is behind Stock Trading.
Basically, companies sell their stock in order to received funds from investors. Those investors then become shareholders of the company and can claim a part of the company’s earnings. Investors can now be considered as owners of the issuing company. Let’s illustrate that with an example. Let’s imagine company X issues (sells) 1000 shares and that investor A invest in 200 shares. This would mean that investor A own and claim 20% of the company’s assets and benefits distributed on the stock market.
Owning the stock of a company gives you many rights such as the right to vote in the shareholders' meeting, the right to receive a dividend at the end of the year (based on the company's profit), and the right to sell your share to someone else.
In case you own the majority of the shares (more than 50%), you indirectly control the company because you choose its board of directors. Most of the time this is what happens when a company acquires a new company.
However, for the majority of shareholders, not being able to manage the company is not of great importance because what the shareholder is looking for is the good performance of the company and the possible gain on the resale of the share or dividend at the end of the year. The more shares you own, the more dividends you receive!
But how can you access these stocks? Well, to be able to trade stock, you need to go through a broker to buy the stocks you desire. Indeed, the corporation issues its shares on the stock market such as the Nasdaq for example. Investors can buy or sell their shares among themselves and the stock market exchange, depending on the supply and the demand, will adjust the price of the stock. A stock for which the demand is high will see its price go up, whereas a stock for which the demand is declining, will see its price fall, as people are willing to sell it cheaper to get rid of it. On Flowbank, you have the possibility to buy stocks from all listed companies, so go and have a look at your favorite companies!
Why is stock trading so popular?
Trading shares is very popular. Indeed, the price of these shares fluctuates throughout the day and therefore represent a financial instrument loved by both short- and long-term investors. Not only that, but it is also an instrument that is fairly easy to understand and trade. However, investing in stocks is not without risk. Every investor who invests in a stock hopes that its value will increase over time. This is not the case all the time! Some companies may go bankrupt, which would see the investor lose all his invested money! This is why it is advisable and very important to diversify your investment in several companies from several different fields. Diversifying the investment avoids the risk of losing your money all at once because of a bad investment.
Are there different types of stock?
Yes, there are two main types of stock: common and preferred stock. The difference is that for common stock, the owners have the right to vote at the shareholders' meeting. Concerning dividends, investors can receive a dividend, but the dividend is not guaranteed or fixed.
Preferred stocks offer fixed dividends, so investors can count on an extra income every year. But while preferred stock owners generally do not have voting rights, they have greater power over the claim of income compared to common stock owners. The dividend is paid first to the preferred stock owner and then to the common stockholder. In a bankruptcy case, the preferred stock owner also receives the liquidation first.
Other stock characteristics
Within these two categories – common and preferred – stocks can have different characteristics worth having a look at in order to make your choice (for more info, see how to analyze a stock)
Total Market capitalization: This category refers to market capitalization. It means the company’s total valuation on the stock market. The market capitalization is obtained by multiplying the total number of shares by the share price. Generally, companies are categorized into 3 segments. The first one is "Large Cap", this refers to all companies with a market value of 10 billion or more. These concerns companies like Apple or Amazon for example. The second one is "Mid Cap" which is for all companies with a market value between 2 and 10 billion. Finally, the third category is "Small-cap" which concerns companies with a market value between 300 million and 2 billion.
Industry: Companies are also divided according to their field of activity - for example, technology companies and manufacturing companies will not have the same reactions to a market or economic event. That is why, when you invest, it is advisable to diversify your investments across several different industries! Industries also have sub-categories, i.e., manufacturing can be car parts, furniture, or clothing.
Location: We can also differentiate the stocks by looking at the locations. Indeed, it can be interesting to vary your investments depending on the country of the stocks. Not only investing in American companies but also in international companies or even in emerging countries is a widespread strategy given the potential of these regions. If you invest all of your money in a country and that this country’s economy fails, it might not be so great for your investment.
Style: By style, we define the differences in growth between different stocks. In effect, some investors will turn to extremely volatile stocks and look for a quick profit while others will invest in a company over the long term. These are growth stocks vs. dividend stocks. Growth stocks tend to have a good chance to be worth more in the near future but offer less dividend as the cash is usually invested back in the company. Dividend stock has generally little growth opportunity and hopes to retain investors by giving them superior dividends.
What are Authorized shares and Outstanding Shares?
Being able to understand stock terms and their meanings allows investors to make the most appropriate decisions. Regarding stocks, knowing the difference between Authorized and Outstanding stock is essential to be able to calculate important ratios in relation to a company's financial health.
In a few words, Authorized Shares are the maximum number of shares that a company is legally authorized to offer for sale to investors. This number is established in relation to the legal formation of the company.
For large companies, there is generally no limit on the number of shares, however, smaller companies must comply with these rules.
Concerning Outstanding Shares, this refers to the total number of shares a company has issued to its public investors, company officers, and insiders. It is the total sum of shares issued by the company. This number is usually less than or equal to the authorized shares.
Typically, investors use the number of outstanding shares to calculate the company's market capitalization or earnings per share.
How to make money with Stocks?
As we have seen, there are two main ways to earn income by owning a stock.
The first is through its value. Indeed, the value of a stock fluctuates daily and is dictated by the performance of the company and by various events affecting it. Buying shares of a company just before it booms is every investor's dream!
The second is through dividends. As we have seen, depending on the type of stock you own, you may be entitled to its dividends. Concretely, a dividend is a payment that the company makes to its shareholders.
As we have seen, to gain revenue with stock is pretty easy to understand. That’s why over the years, the stock market has become one of the most popular in the world. With a total market value in excess of trillions of dollars and investment diversity, stocks represent a financial instrument of choice for any investor.
Moreover, its access has been greatly facilitated and you can access these investments very easily via online brokers. With our FlowBank Pro platform, you will have access to thousands of different stocks at very advantageous rates!
To understand stock market indices or investment in stocks, it is interesting to understand what is a
market capitalization. Stock exchanges and stock market indices necessarily require monitoring
main stock market indices based on equity investors.