Deep Dives
Stocks

Stocks, stock market, stock exchange… you may be wondering what it all means. If you’re just starting out thinking about investing, it’s important to understand the different types of securities in which you can invest. Let’s break down what this means.

Stocks
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July 5, 2022

Stocks, stock market, stock exchange… you may be wondering what it all means. If you’re just starting out thinking about investing, it’s important to understand the different types of securities in which you can invest. There are generally two types of securities: equity and debt. Stocks fall into the equity category. Let’s break down what this means.

“Equity” represents ownership in an entity. Stock is fractional ownership in a company, partnership, etc. which entitles the stockholder to a proportion of the entity’s assets equal to the amount of stock they own. Units of stock are called shares. Companies sell shares of stock to raise money to run their business. 

For example, have you seen the television show “Shark Tank?” Entrepreneurs pitch their businesses to investors in exchange for ownership portions of their company. The entrepreneurs then use the investors’ money to build and expand their business. In exchange, the investors are entitled to the assets and profits of the business. The amount of ownership is determined by the number of shares purchased relative to the number of shares outstanding. Say you buy 1,000 shares of ABC Corporation and ABC has 100,000 shares outstanding. That means you own 1% of the shares of ABC. 

Stock Types

There are two types of stock: common stock and preferred stock. When the term “stock” is used, it is generally referring to common stock. Common stock allows the shareholder voting rights at elections such as for the Board of Directors. Preferred stock does not have voting rights but is named for the preference given to those shareholders for dividends and in the case of a bankruptcy or liquidation event. This means if the corporation were to liquidate its assets, preferred stock shareholders would have claim on assets over common stock shareholders.

How Does the Stock Market Work?

For publicly traded companies, shares of stock are sold to the public on stock exchanges. Stock exchanges are secondary markets where existing owners of stock can sell shares to buyers. “Secondary market” means that the corporations whose shares are transacted are not the seller or buyer.  A company will list its shares in an initial public offering (IPO) and investors will purchase shares. After the IPO, investors will buy and sell shares amongst themselves on exchanges. 

If you have ever watched stock tickers on the news, or have added a bunch of tickers to your stock app, you’ve seen the prices of stock fluctuate throughout the day. How are those prices determined? Share prices are primarily dictated by supply and demand. The more investors who want to buy shares, the higher the price. Sellers will issue an “ask” price or the price they’re willing to sell at, and buyers issue the “bid” price at which they’re willing to buy. When the trade is made between the buyer and the seller, the price at which the trade occurred becomes the quoted market value, which is the price you see on the ticker feed on news stations and online.

How Do I Invest in the Stock Market?

There are many different options when it comes to investing in stocks. First it’s important to understand what investing is and the risks associated with it. We’ve outlined the basics of investing for you to help you get started.

 

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