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What are stocks?

There are different types of stocks that companies can issue – below are some of the most common. Stocks give you ownership of a company.

There are different types of stocks that companies can issue – below are some of the most common. [1]

  • Common stock. As you may have guessed, this is the most common type of stock that a company issues and it gives each holder a single vote at the company meeting. These stockholders are also at the end of the line if the company goes bankrupt with debtholders, creditors, and preferred stockholders all above them. They’ll be eligible for dividends; however, they are not entitled to them, as dividends are based on the company’s discretion (for example, you may have noticed how many high dividend-paying companies, such as banks, have suspended dividend payments during the coronavirus pandemic).
  • Preferred stocks. This type of stock entitles you to receive dividends before common stock owners and also entitles you to receive payments should the company go bankrupt.

There are also a few different classes of stocks; they’ll be denoted by designated letters such as A, B, or C and typically they’ll offer specific voting rights per class.

As we discussed above, stocks give you ownership of a company. They are a way for investors to own some of the largest companies in the world, whereas bonds are an interest in a company’s (or other entities’) debt.

With stocks, you’ll make money through a share price increase (e.g. company appreciates in value) and dividends, whereas with bonds you’ll most likely make regular interest payments. With equities, there is more risk involved, as companies can go bankrupt and they are more susceptible to external forces (e.g. economic downturns). However, with that risk comes a higher return potential. With bonds, there is generally lower risk, but returns are limited. [2]

References

1. Napoletano, E. Investing basics: what are stocks? [Internet]. Forbes; 2020 May 29. Available from: https://www.forbes.com/advisor/investing/what-are-stocks/

2. What are stocks and shares? [Internet]. Commsec. Available from: https://www.commsec.com.au/education/learn/investing-basics/what-are-stocks-and-shares.html

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