In the Dugout: What is a Stock

In its simplest form, a stock is ownership in a company. Let's say you have a friend starting a new business and you feel it could be a huge success. You might approach your friend about investing a sum of money in the business in return for a percentage of the company. If the company does indeed grow, the value of your percentage would also grow. That's all a stock is. Of course, when we are dealing with stocks that are publicly traded, your percentage of ownership is very minor. So the idea is to invest in companies that you feel will be successful so your small portion of the company pie will increase. We have all heard how wealthy Bill Gates is. For those that haven't, he is one of the Founders of Microsoft Corp. Since Microsoft is the largest company in the world, it is needless to say that Bill Gates is the richest man in the world. Mr. Gates wealth is around $50 billion, but this is not sitting in a bank somewhere, but is the value of his holdings in Microsoft stock.

Stocks also carry certain rights, mainly the right to vote on issues involving the company and the right to receive dividends. A dividend is often paid by more established companies as a way to share company profits with the shareholders. The decision to pay or not pay dividends is made by the Board of Directors. These people are voted on by the shareholders. The whole process is similar to the political process. Shareholders vote for those they feel will best represent the needs of the shareholders.

There are several types of stock, but the two that are most prevalent are common stock and preferred stock. Common stock is differentiated from preferred in a couple of ways. First, preferred stock will pay a stated dividend. This must normally be paid to preferred stock holders before any dividends can be paid to common stock holders. The other difference is that preferred shareholders are higher on the food chain, sort of speak. Let me explain. If a company goes bankrupt, there is an order in which the assets of the company are dispersed. Preferred shareholders are a step above common stock owners. Actually, common stock is on the bottom of the list. This is because stock is ownership, and the last to be paid are the owners. Even so, common stock ownership has proven to be the most profitable over time.

The average stock has appreciated about 11 percent per year over time. There are no other investment vehicles that can boast anywhere near a similar return. Two of the other options are bonds and CDs. Both of these are interest-bearing vehicles, which have averaged just half of what stocks have over time.

The great thing about the stock market is that it is extremely liquid. This means you can buy a stock of Microsoft and then sell it in a matter of seconds. Not that this is the best way to trade stocks, but the availability to get in and out with relative ease is an advantage to stocks over say real estate, which is very hard to buy and sell quickly.

Overall, stock trading and investing can be very profitable. The key is to learning the way the system works and how to best fit the system to your own style. These are things we will be discussing in future articles.

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