HomeBlogInvest in stocks: What they are and how they work

How does owning a share of your favourite company and getting great returns over the long run sound? A stock is a type of investment that represents an ownership share in a specific company. Also known as equities, public companies sell their stock through a stock market exchange like the London Stock Exchange (LSE), the New York Stock Exchange (NYSE) or the Nasdaq from where investors can then buy and sell these shares. The stock exchanges track the supply and demand of each company’s stock, which in turn affects the stock’s price.

Owning a stock makes you a shareholder, which means that you may have a say in some company decisions, while you may be eligible to receive dividends. Stock prices fluctuate throughout the day. When the company whose stock you own does well, the value of your shares goes up, however, the opposite may also hold true. If the company loses value or goes out of business completely, your stock’s value will also go down or you may lose part of your investment. An effective way of avoiding this from taking place is by spreading your money around and buying stocks in different companies.

Example

Here is a super simple example to better understand what owning a stock looks like.

If a company has 10,000 shares of stock outstanding and you own 1000 shares, this means that you own 10% of that company and the value of your shares will represent approximately that percentage of the company’s market capitalization.

A slightly more complex example would go as follows.

If we assume that a large, highly-established company has 4.23 billion shares of stock outstanding, owning a single share would mean that you own 0.0000000189%. Although that might seem like a tiny fraction, if the company is large enough that small fraction will have some value. A company’s market capitalisation is calculated by multiplying the total number of shares with the per stock value. So, if one share of this company’s stock is worth $53.08 and it has 4.23 billion shares, its market cap is that of $224.43 billion.

Why do companies go public and sell stock?

Whereas for investors, stocks are a way to grow their money and outpace inflation over time, for companies issuing stocks is a way of raising money which can be used to grow the company and invest further. Going public is one way for a private company to raise money, a process which is usually launched with an initial public offering, more commonly referred to as an IPO.

What sets a company’s stock price is public demand for a company’s IPO. if demand for the stock is high, the price of the stock may also be high and in contrast, if demand is low, the stock price may also be low.

What are the different types of stock?

There are two main types of stocks – common and preferred stocks.

Common stocks

In all likelihood, if you own a stock it would probably fall under this category. A common stock entitles owners to vote at shareholder meetings and receive dividends, however, these may not be guaranteed, while the amount is not fixed. Usually, each share you hold equates to one vote, which means that if you attend annual general meetings, you can vote on issues such as electing people to the board, stock splits and other corporate issues.

Preferred stocks

In contrast, preferred stockholders don’t have voting rights but they receive dividend payments before common stockholders. Also, preferred stocks can be repurchased by the company at an agreed price.

Common and preferred stocks may also fall into one more of the following categories:

Growth stocks: these usually have earnings growing at a faster rate than the market average, but they rarely pay dividends. For example, a tech start-up is likely to be a growth stock. Investors looking for capital appreciation typically buy these.

Income stocks: these pay dividends consistently and investors buy them for the income they generate. Established companies are more likely to be income stocks.

Blue-chip stocks: these are shares in large and highly popular companies with a solid history of growth like the likes of Apple (AAPL), Amazon (AMZN) or Netflix (NFLX). These are usually traded on main stock exchanges like the Nasdaq or NYSE.

Value stocks: these may be growth or income stocks, however due to their low price-to-earnings (PE) ratio, they are cheaper than those with a higher PE ratio.

Why invest in stocks?

Here are some benefits of investing in stocks.

Achieve capital appreciation

Stocks offer investors great potential for growth, otherwise known as capital appreciation, over the long haul. In fact, those who have stuck to their stocks for long periods of time, say 10 years or more, have generally been rewarded with strong, positive returns.

Stay ahead of inflation

The historical average stock market return is 10%, which is far better than the average annualised inflation rate. Inflation is the decline of purchasing power of a given currency over time. This means that you must have a longer time horizon, but you can buy and hold even if the value temporarily drops.

You may get paid dividends

Dividends are regular payments of profit made to investors who own a company’s stock, distributed based on each shareholder’s stake in the company. If for instance, the company you have invested in pays a dividend of $0.87 and you own 100 shares, that’s $348 in dividends in a year.

What are some common terms?

Here are just some common stock terms you may come across and what they mean.

Stock splits – to make its stock price more accessible, companies may decide to split its stock. Although this will not change the company’s market capitalisation, in other words, the overall value of its share, the stock split increases the number of shares available.

Rally – this takes place when there is a rapid increase in the price of a particular stock or in the market’s general price level.

Public float – this refers to stock that has been released to the market and is traded publicly though an exchange.

Close – this is the time at which a stock exchange closes to trading. For example, both the New York Stocks Exchange and the Nasdaq close at 4pm.

Market/limit/stop orders – when trading, you need to choose between a range of order types. A market order is a request to buy or sell a stock at the best available price. A limit order sets a maximum price to pay, while a stop order allows you to set a trigger price in the system which will only execute if the price hits the desired level.

Despite the benefits, stocks do come with risks, while there is no guarantee that the company whose stock you have invested in will grow and do well. As mentioned earlier on, one way of offsetting any risks is to diversify your portfolio, in other words, to spread your money by purchasing stock of several different companies. Another option is to invest in other kinds of assets alongside your stocks, such as bonds, funds or ETFs.

With CCTrader you can trade over 20,000 instruments including stocks, bonds, ETFs and funds in over 40 international markets. Buying stocks only takes a few minutes. Once you have downloaded CCTrader from the App or Play Store, have onboarded successfully and deposited some funds, just select the stock you would like to invest in and hit buy. Alternatively, visit live.cctrader.com and repeat the same process.

Not sure what stocks to invest in? Thanks to our brand-new discovery section you can explore trending stocks, those that are popular to hold, most bought stocks on the platform, popular dividend stocks and so much more.

And here is a list of some stocks you might want to consider adding to your portfolio.

CC Trader is brought to you by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business by the MFSA under the Investment Services Act.  


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