Everything you need to know about stocks- that will be the topic of this article.
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Table of Contents
Example: So… What are stocks? Imagine if you wanted to have an Apple… Not the company but the fruit. Let us assume that you can’t afford to buy an entire one, but, yeah, sounds ridiculous, let’s just assume that… now, you have a craving for an apple, and you have 50 cents.
You had a friend named ‘Johnny’ and he had an apple that cost him $2. However, let us again assume that Johnny and you were going down a locality and came across an ice cream truck. Johnny wants to have an ice cream, which surprisingly costs around 50 cents, and you still want an apple.
Now, let’s say that Johnny cut the apple he had into 4 pieces and gave a piece to you which would mean that he gave a piece of apple to you that would cost around 50 cents.
Now, Johnny could buy the ice cream worth 50 cents, for which he had a craving, and you will have your dream come true (which is getting an apple).
In the same manner, let us assume a company, which is, let’s say, SpaceX. SpaceX wants to have the necessary funds for the development of their company so that they can invest in their new project.
When such a situation arises, SpaceX would get itself listed on a stock exchange and sell some fractions of the company that are known as ‘Shares’. So, we know about shares now, then what are stocks?
Stock is a collection of shares in a company, which can either be a single share or a bunch of shares. Depending on the value of the shares in a company and some other factors, the number of shares in stock might differ.
Therefore, when a person says that they are investing in shares or trading with shares, they aren’t investing/trading with shares, instead, they are getting involved with stocks.
As mentioned above, Shares are nothing but the part ownership of a company that is sold to ordinary people or institutions to raise funds. By raising these funds, the company would be able to fund the activities that are necessary for the development of the company.
A person who owns a share or shares in a company can be called a ‘Shareholder’ or a ‘Stockholder’, or a ‘Stakeholder’.
For example, let’s say SpaceX needed some funds to develop its projects such as Hyperloop (super-fast trains), In-orbit Satellites (which roam under the atmosphere of earth), etc., and it has used all the existing funds for the Mars project (making Mars an eligible place for people to travel and live).
Now, SpaceX would offer its shares on a stock exchange, which would lead it to raise funds so that it can continue developing its other endeavors.
Similarly, any company would offer its shares so that it can get some capital to deal with the expenses related to other developmental activities.
You might’ve been hearing about this word a lot so far… so, what exactly is a stock exchange? Stock Exchange, which is also known as a ‘Securities Exchange’ is a place where brokers and traders can buy and sell the shares of companies, or any other investment vehicles such as bonds.
For most of you who might not be familiar, brokers act as middlemen between companies and traders regarding the shares of a company, while traders are the people who buy and sell the shares to make a profit from the difference between the selling price and buying price of a share.
Investing Procedure (then and now) – Previously, the stock exchanges would be physical locations/organizations that had a lot of employees. These employees would receive calls from people (traders/investors) regarding the details of the amount they want to invest in a particular stock.
Then the person who received the information regarding the transaction of the stocks will send it to other employees to confirm the purchase/sale of stocks.
People would be dialing numbers and shouting about the transactions and the whole place could be a mess. You can get an exact idea of this scenario if you are familiar with the movie ‘The Wolf of the Wall Street’.
Time went by, things changed, and the advancement in technology has resulted in an enormous change in the operational procedure of the stock exchanges.
Nowadays, stocks are being traded online with the help of online trading platforms or online brokerage firms. These online marketplaces are more convenient and easier to use when compared to the procedure of traditional stock exchanges.
In general, brokerage firms or trading platforms allow people to buy or sell stocks on their online platforms while charging certain types of fees and charges.
There are two types of fees that are charged by these institutions, which are known as trading costs and non-trading costs.
- Trading fees:
These are the costs that are directly related to the trading activity on a marketplace. In simple terms, if you are trading with stocks, then you will be subjected to these types of costs.
Some common examples of trading fees are commissions, spreads, stock trading fees (fee per trade), etc.
- Non-Trading fees:
In contrast to the trading fees, non-trading fees are the types of fees that aren’t involved with the trading activity.
Some examples are withdrawal fees, minimum account balance, deposit fees, inactivity fees, etc.
Why should you invest/trade?
Why should a person invest in stocks and what are the benefits they get? For beginners, the whole intention of investing in stocks is to gain profits.
How can a person get any sort of profit by putting his/her money into a specific company? There are two specific methods in which a person can be able to attain profits with the help of trading with stocks, which are as follows.
Any company would generally get profits once their products and services are performing well in their respective field. For example, let us have a look at an example for having a good understanding of dividends.
Imagine that you invested some money in a company, let’s say, Netflix. Because of the lockdown situation all over the world due to the COVID-19 pandemic outbreak, more and more people started to get a Netflix subscription.
Because of this, the company started to see a lot of profits. As we said earlier, buying a stock of a company means that you are becoming a part-owner of the company. As you are a part-owner of Netflix now, you would be eligible for a fraction of the profits obtained.
If you owned 1% shares of Netflix (just an assumption) and the profits obtained by Netflix were $2.75 billion, then you would be entitled to a profit of $2.75 million.
Depending on the company, dividends can either be paid out to the shareholders or can be reinvested into the stocks. When the dividends are reinvested, the stocks owned by a person increase over time, which can lead to an increase in the stock’s price (by a significant amount).
Dividends can be paid out quarterly, semi-annually, and annually, while the companies can also pay out dividends additionally whenever they perform well. The dividends in a company can be paid as stocks or cash depending on the decision of the company’s board of directors.
A most important aspect that should be taken into consideration is that dividends are subject to taxation, which can be deducted at source or must be declared while filing tax returns. Depending on the country, you may or may not have taxes on the dividends.
- Capital Gains:
Capital Gains are the profits earned by investors, which are the most preferred form of obtaining money over their investments.
To let you understand the process in a simple way, imagine that you bought a stock for $100, and the price increased over time. Let’s say that the price of stock experienced a surge of $100 and the stock price became $200.
The difference between the purchasing stock price of $100 and the current price of $200, i.e., $100 is the profit obtained by a person. These profits obtained by selling a stock for a higher price than the price for which the stock has been purchased is known are known as ‘Capital Gains’.
If a person experiences loss, which means he or she gets a price that is lower when compared to the price for which they’ve bought those stocks, then he or she would have a loss in their investment, which is known as ‘Capital Loss’.
Like dividends, capital gains are also taxed depending on the country in which you reside. As people would be required to pay taxes on their capital gains, they can also have tax advantages when they have capital losses (depends on the country of residence).
- ‘Note’ – when a company goes bankrupt, then the individual shareholders are paid an amount that is equivalent to the stock value they own. Moreover, the company would liquidate all the assets and pay the shareholders only after all the liabilities of that company are paid off.
Types of stocks:
Before we get to discussing the types of stocks, let us have a brief look at some of the business sectors defining the business of the company that is selling their stocks.
- Consumer Discretionary
- Consumer Staples
- Real Estate
Having a look at some of the important business sectors, we will now know about the types of stocks and the terminology used to refer to some kinds of stocks.
IPOs – New companies, which are called ‘Startups’, offer shares at a very low price on a stock exchange, which are known as ‘IPOs (Initial Public Offerings)’.
Getting into more about IPOs, we must discuss a bit more about companies in general. For example, if a company has a good reputation and it offers its shares on a stock exchange for the very first time, then everyone would be interested in buying the shares of a company.
For instance, if the company was something that had a lot of fame such as ‘Apple’, ‘Netflix’, ‘Tesla’, ‘Amazon’, etc., most people would be familiar with the reputation of these companies and would be interested in buying the shares of such companies as soon as they are available on a stock exchange.
When somebody wants to buy shares of a company with the help of a stock exchange, then he/she would usually opt for a company that already has a lot of reputation in the market. Usually, people won’t go for companies that they aren’t familiar with, which makes startup companies have a hard time selling their shares.
These shares, which are offered by a startup company would sell the shares for a very low price, and this type of offering of shares would be called ‘Initial Public Offering (IPO)’.
By breaking down the terms in the word, we can have a better understanding of the topic. Initial is the first word, which means that the company is most likely to be offering the stocks for the first time.
The public is the second word, which refers to the situation where the stocks offered by a company are sold to the public.
Finally, offering, as we all know, is the shares of that respective company that are being offered to the public to raise funds for its developmental activities.
The majority of the companies that offer IPOs are startup companies, as those are the companies that are mostly in the necessity of funds to develop their activities. At a particular point, almost every company would have to start as an IPO.
Common Stocks – Any general stock that a person would invest in is called a ‘Common Stock’. Any traditional stock can be referred to as common stock.
As discussed before, when a company goes bankrupt, the shareholders are paid only after the liabilities of that company have been cleared. This means, if there are no assets after clearing the liabilities, the shareholder would be left with nothing.
Preferred Stocks – There is a major difference between common stock and a preferred stock, i.e., preferred stocks offer a certain amount back to shareholders regardless of the liabilities that are to be cleared (in case of bankruptcy).
Another advantage offered to shareholders of preferred stocks is that they are presented with dividends before the dividends are paid out to common shareholders.
Large-Cap Stocks – Stocks of companies having a large market capitalization are known as ‘Large-Cap Stocks’. Large-Cap Stocks are safe and have a stable growth over time.
Mid-Cap Stocks – The stocks of companies having a medium amount of market capitalization are known as Mid-Cap Stocks.
Small-Cap Stocks – By referring to the two types of stocks mentioned above, we can understand that Small-Cap Stocks are the stocks of companies that have a small market capitalization.
- Note – There is no specific limit in determining the stocks whether they are large-cap, mid-cap, or small-cap stocks.
However, to let you have a better understanding, any company having a market cap of more than $10 billion can be considered as a large-cap company, companies with a market cap between $2 billion and $10 billion are mid-cap companies, and companies with lesser than $2 billion are small-cap companies.
As we said, large-cap stocks are considered safe compared to the other two types. Nonetheless, even though mid-cap and small-cap companies are a bit risky, the capacity for having growth is higher.
Domestic Stocks – These are the types of stocks that are offered by the companies located in your own country. These stocks are traded on the stock exchanges of your country.
International Stocks – International Stocks or Foreign Stocks are the stocks of companies located outside your country and are traded in the global markets.
- Note – while categorizing a stock in determining whether it is a domestic stock or an international stock, the location of the headquarters of that company is taken into consideration.
Nevertheless, some companies might get a majority of sales from outside your country, yet it doesn’t mean that the company’s stocks aren’t domestic stocks.
Growth Stocks – While mentioning large-cap stocks, mid-cap stocks, and small-cap stocks, we already discussed that mid-cap and small-cap stocks have a higher potential of getting more sales and profits.
Like most things in life, good things come along with certain bad things too. It is the same in this case as well because these types of stocks have a higher potential for growth along with huge risk.
Some growth stocks perform better compared to many other rivals because of the demand for the products and services offered by them. However, their efficient counterparts might become a threat to their business because of their already existing fame.
Moreover, even the slightest price change can cause investors to panic as they fear that there won’t be a long-term growth of that stock.
Value Stocks – Stocks that are in contrast to growth stocks are known as Value Stocks. Value Stocks belong to companies that have a good reputation and perform well in their line of business. Therefore, people usually expect these stocks to be a better type of conservative investment.
Dividend Stocks – As the name itself suggests, dividend stocks are the type of stocks that offer dividends to their shareholders.
Non-Dividend Stocks – Non-Dividend Stocks are the stocks of some of the multinational companies that don’t pay dividends to their shareholders. However, the trend over recent years is that most companies usually pay dividends.
Income Stocks – Dividend Stocks are also known as Income Stocks, which is because these stocks offer income in the form of dividends. Income stocks are also the stocks of mature companies that are known for having long-term growth opportunities.
Cyclical Stocks – One of the major indicators for the performance of some stocks is the economy. If there is a significant change in the economy, the price of these stocks is also influenced.
Such types of stocks are referred to as Cyclical Stocks. Stocks of companies belonging to sectors such as travel, manufacturing, etc., are a few examples of such types of stocks.
Non-Cyclical Stocks – The Stocks that aren’t influenced by the ups and downs in the economy are known as Non-Cyclical Stocks. For example, the stocks of companies belonging to sectors such as food. Nobody can survive without food, regardless of the economic situation.
Safe Stocks – Also known by the name of low-volatility stocks, safe stocks are those, which have small price movements when compared to most of the stocks in the market. Additionally, these stocks do pay dividends as well, which makes them a good form of investment.
ESG Companies – These are the companies that primarily focus on the environmental, social, and governance aspects. Instead of just concentrating on the profits, ESG investing allows you to make an investment without having to compromise on your interests for the environment, workers, customers, etc.
ESG investing rules are linked with Socially Responsible Investing, which is also called ‘SRI’. Even though most rules are similar, people who buy the stocks of companies abiding by the rules of SRI would still miss on some of the values.
Nevertheless, ESG investing is investing in companies that follow all the governing rules by having 100% commitment towards ESG principles. Nowadays, as people are becoming more and more conscious about the environment, a large proportion of investors are interested in ESG investing.
Blue Chip Stocks – Blue Chip Stocks are the stocks of companies that perform well in their respective sector and have gained a lot of reputation because of the quality of their business.
Even though the Blue Chip Stocks don’t provide the highest profits, they are stable and known as an excellent choice among many traditional investors. Adding to that, the amount of risk involved with these stocks is comparatively low.
Penny Stocks – Penny Stocks are completely opposite to Blue Chip stocks. In simple context, they are of low quality, have more risk involved, and highly volatile. However, they are extremely cheap and even have a possibility of having higher returns.
It is strongly advised that a person should know everything about penny stocks and the dangers involved with them before hastily buying them because they can drain all the money you’ve invested.
Having a diversified investment portfolio helps in the growth of an individual. Adding to that, having a diversified stock portfolio would come in handy in creating a well-balanced portfolio.
The details given above provide all the necessary information for distinguishing between different types of stocks and creating a well-balanced stock portfolio. Nevertheless, some people might find it hard to create a portfolio or choose between stocks.
If you are a person struggling to have an excellent stock portfolio, looking for financial advice, or trying to find a wealth manager to take care of your financial requirements, then you are in the right place. Moreover, we can also help you in learning how you can invest by yourself.
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