Curiosity in the buying and selling of stocks has increased dramatically over the years as people are more interested in investing. Stocks have become a significant part of well-balanced and wealthy portfolios of many investors. But these investors were not without some knowledge about the process of making money from their stocks. Stocks fluctuate all the time and if you are not well-versed in the language of financial investing, you could potentially be in deep water without a lifeboat in sight. Buying and trading stocks is a complicated and multifaceted activity that requires some basic knowledge if you want to make any money.
Types of Stocks
There are two main types of stocks, common stock and preferred stock. The majority of stocks are issued as common stock because that is exactly what they are: common. Common stock is made up of shares of a specific company that claim a portion of the profits of the company, known as dividends. Aside from the dividends, investors also get one vote per share to elect board members to oversee the management of decisions. Common stock is the fastest means to capital growth because of the potential for high returns, but high returns also include high risk. Common shareholders are at the bottom rung of the company’s ladder. For instance, if a company goes bankrupt and liquidates, holders of common stock will not be paid until the creditors, bondholders, and preferred shareholders are paid first.
Preferred stock is the other type of stock. Ownership of the company is represented, but the voting rights are different for every company. The upside is that preferred stock is guaranteed a fixed dividend forever, unlike common stock that is not guaranteed at all. Also, in the event of liquidation of the company, holders of preferred stock will be paid before those of common stock, though still after debt holders.
Trading Stocks
Most stocks are traded through exchanges of buyers and sellers. Exchanges can be made either in a physical location like an exchange floor, or virtually through a network of computers. The stock market is simply a facilitator of buyers and sellers to reduce the risk of investing. There is a difference between the “primary” market and the “secondary” market. The primary market is where stocks and securities are born or created, while the secondary market is the actual “stock market” where previously-owned stocks are traded. The companies that issued the stocks are not involved in the secondary market. The two main stock markets are the New York Stock Exchange (NYSE) and NASDAQ. NYSE is the type of exchange in which stocks are traded face-to-face. Prices of stocks are determined through an auction, where the current price is compromised between the highest bidding price a buyer is willing to make and the lowest price a seller is willing to make. NASDAQ is the leading exchange where trading is done virtually, through computers. Many big-name technology companies reside in the NASDAQ exchange, such as Microsoft, Cisco, Intel, Dell and Oracle.
By Monica Drusch