Stocks provide you with ownership in a public corporation. While stock is a generic term used to indicate ownership, share is a specific term that is used to point to ownership in a specific corporation. The shares in a company are sold by the original owners of the company inorder to raise funds for the company to expand. This offering is called Initial Public Offering. After the IPO the shares are resold on the stock market.
The prices of stocks are driven by expectations of corporate profits and growth.
There are two ways in which stock owners can earn return on their investment. The first is when they buy a stock when its price is low and sell it when its price is high. Ownership of a stock does not guarantee returns because the stock price may go high or low depending on market sentiments. There have been cases where entire investments have been eroded owing to market crashes.Another way stockowners can earn profit is when the company pays a dividend. These are quarterly payments distributed to shareholders on a per share basis. It is the company’s board of directors who decide pay dividends out of company’s earnings. It is kind of an incentive to the shareholders. Blue chip companies pay dividends more often because they have lesser scope for growth as compared to new corporations.
Types of Stocks
There are two types of stocks, common and preference. The Indian Market Indices, Sensex and NIFTY track common stocks. The value of common stocks are decided by the expected corporate growth and profits.
There are two types of stocks, common and preferred. The Stock market indices like SENSEX and NIFTY track common stocks. The price of these stocks constantly change based on the market supply and demand at any given time. Common stock owners are also given voting rights.
Preference Shares of preferred stocks are a hybrid instrument which combines the properties of both common stocks and bonds. Their value also fluctuates on similar lines of common stocks. However, like bonds they also have fixed payouts. Because of their attractiveness on this count, preferred share are considered more valuable than common stocks.
In addition to this classification, stocks are classified into different types based on different characteristics. We’ll discuss stock classification based on Market capitalisation, Growth Potential etc in the next post