Stocks - Basics you need to know

A lot of people are interested to learn about stocks mostly because of what they see in the news or in movies. Despite the popularity of stocks though, there is never enough basic information about it to get average folk interested. To better understand stocks, continue reading.

What is a stock?

The nitty-gritty of it is a stock is simply ownership. In essence, you are paying to be part of a company. This is usually referred to as a share. With a single stock, you are already part of a company and have a claim on any of the company’s earnings and assets. You will also be referred to as a shareholder thenceforth and will earn all the rights that come with it.

What is a stock certificate?

Now, you can’t just claim you have stocks with a certain company. So how do you prove your ownership? Each piece of stock is provided a stock certificate. You usually got these from the stock broker or the brokerage firm that assisted you in buying the stock. Nowadays though, these certificates are kept “in street name”. This means that the certificates are placed in the name of the brokerage firm. Your name will not appear anywhere on it but you will still be listed as the real and beneficial owner.

Why hold it in street name?

Before, only those of the upper class could afford stocks or had an interest in them. That’s why it was a lot easier to track each certificate. Nowadays, a lot of middle class people have begun investing in stocks which makes tracking all certificates more complex. To make things easier, brokerages keep it in their name. That way, whenever any client wants to sell their shares, they can do it quickly as there is no distinguishing between shares of different persons.

What determines the value of a stock?

No single investor can perfectly predict stock changes. It is worth noting that the public’s view of a company’s earnings potential is more or less what makes or breaks the value of a stock. Additionally, actions taken by their employees, particularly CEOs, also adversely affect the market.

Is there risk?

Just like any other investment program, stocks also hold considerable risk. While some companies may pay dividends, majority do not. In this case, the only way for you to earn from your endeavor is if the stock appreciates in the market. In the event that it doesn’t, your money is as good as down the drain. Still, a lot of people take the risk due to the high return of investment (ROI) that stocks offer. Based on historical accounts, stocks typically offer a return of 10-12% which is larger than most bonds and savings accounts.