Part 1: What is a Stock

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”  – Paul Samuelson

The New York Stock Exchange was created in 1792. Over the years, it has contributed to creating fortunes as well as misfortunes. Although the stock market has been around for over 200 years, there are still many questions that arise when talking about stocks.

The U.S. is the home of the largest leading stock exchange in the world, The New York Stock Exchange (NYSE).  In 2017, The NYSE issued over $22 billion worth of stocks to its investors. Listed below are the top ten leading stock exchanges in the world.

Before we get too deep into the stock market, we should go over the functions of a stock and the different types of stocks. The more we learn or educate ourselves about investing the less risky it feels.

What is a Stock?

Investopedia defines a stock as “a type of security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings.” In other words, a corporation gives the public a chance to buy a portion or a share of their company. Those who own stocks are considered shareholders of that corporation. For example, if you buy one share of Google stock, you now own a small portion of Google. Share prices are generally determined by supply and demand. Usually, the big corporations like Apple or Amazon have higher share prices.

Types of Stocks

Common Stock – This is the general stock type that most investors buy. The common stock allows for each shareholder to vote on corporate matters. Most common stockholders receive a quarterly dividend that will vary depending on the profitability of the corporation. These dividends are not guaranteed.

Preferred Stock – Does not allow shareholders to vote.  However, preferred stocks must provide a fixed dividend for its shareholders. Preferred stockholders have a priority to receive funds even if the corporation goes under.

Pros

Most people invest in stocks with the hopes of:

• Long-term appreciation: Stocks will increase in value over time.
• Capital Gains: Profits from selling stock at a higher price than purchased. The gain is not taxed until the asset is sold.

• Receive a dividend: A dividend is income that a corporation pays to its shareholders. Note: All corporations do not pay dividends.
• Inflation protection: Some dividend-paying stocks help protect your money from inflation.

Cons

Throughout your investing career, you will lose money at some point. It’s all a part of the game.

• Potential loss of money: There is the potential to lose money with each investment.
• Risky: There are always risks when investing.
• Volatile: The stock market is sensitive to real-world events. The market’s success is correlated directly with any positive or negative impacts on the economy.
• Can be confusing: Choosing the right stock to invest in requires educating yourself.

Although investing may seem risky, educating yourself on the process of investing will help control or eliminate some of the risks. Familiarize yourself with stock basics and you can become an investor in no time.