The team at The RaeLipskie Partnership serves our clients with a customer-first and community-based approach. We are dedicated to your success and want to help you meet your investment goals whether you’re just starting out or a long-serving investor. We’re going back to the basics this month as we delve into the essentials of stocks.
What are stocks?
Stocks, also referred to as equities, are a form of ownership in a company that is publicly traded on the stock market. When you purchase stock, you become a partial owner of that company and your stock’s value fluctuates based on the company’s performance and the overall market. With some stock types, you may also be allocated shareholder voting privileges.
How do stocks work?
Why do companies sell shares (stock) in their business? In essence, stocks allow companies to grow and build capital in exchange for equity.
The first time shares of a private company are offered to the public is referred to as the initial public offering (IPO). After that, stockholders can buy and sell shares on the stock market where prices vary based on supply and demand. A stock’s price drops when more people are selling their shares, whereas the price rises when more people are buying. People generally sell and buy based on earnings and market predictions for a given company.
How do stockholders make money?
There are a few ways that stockholders make money. One way is by selling stocks at a higher price than the original purchase. This profit is referred to as “capital gains.” However, this also means that stockholders can lose money if a company does not perform well and decreases in value.
Another way that stockholders can earn money is through dividends. Dividends are quarterly payments distributed to stockholders from a company’s earnings based on the number of stocks an individual holds. This can be quite helpful when companies are earning a good profit, but not growing quite as quickly.
Are there different types of stocks?
There are two key types of stocks: common and preferred. Common stocks are the most well-known and are the primary investment vehicle for many people in the stock market. Allowing shareholders voting rights, common stocks have the biggest potential for growth and pay dividends on a volatile basis. That being said, common stocks can ultimately fall to $0 and leave you at a loss.
Preferred stocks do not convey voting rights, but do pay a steady dividend to shareholders at regular intervals, often at a rate that is more attractive than the dividend on the common shares. While these dividends are generally fixed at a set payout amount, certain types of preferred shares (Rate Reset Preferreds, for example) may experience changes in their payout level.
Usually, businesses only offer common or preferred stocks, but there are some instances where both are offered.
Stocks are also sometimes categorized into different groupings such as growth, value or blue-chip stocks. Growth stocks are predicted to grow quickly, but do not usually pay dividends. These companies may not even be making a profit yet, but investors believe the company is primed to flourish. Value stocks focus on dividend payment for long-term earning potential since the stock price itself is unlikely to experience much growth. These are typically offered by large corporations that are overlooked by general market trends. Finally, blue-chip stocks might not grow at a rapid pace, but they have established themselves as reliable companies over time. They pay dividends and may be seen as a ‘safer’ investment option.
Where do I start?
If you’re looking to get involved in stocks, there are a variety of places to begin. One of the best ways to start is to work with a portfolio manager (PM). A PM can provide you with relevant advice and insight to invest in the stocks that line up with your personal financial goals. They will help you diversify your portfolio, mitigate risk and make educated decisions. To read more about the benefits of working with a PM, you can reference our April blog: “4 Benefits of Working with a Portfolio Manager.”
If you have more questions, The RaeLipskie Partnership team is more than happy to help. Feel free to reach out to one of our Portfolio Managers for further guidance. Stay tuned for next month’s blog when we move beyond the basics of “what is a stock?” and explore how to invest!