How Do You Understand Stocks?


Quick Answer

A stock is a claim to part of a company's assets and earnings. Stock owners (shareholders) cannot manage the company but can vote on management decisions through a representative, explains Investopedia.

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All companies need money to grow. They can borrow this money, but that means having to pay interest on loans. Companies avoid this problem by selling part of the company, which is known as issuing stock. Some stocks pay dividends, but stock owners mainly make money through the stock's appreciation in the market, notes Investopedia.

Historically, stocks have averaged returns of 10 to 12 percent and have a greater potential for profit than bonds, reports Investopedia. However, they are riskier. Whereas stock owners can lose their investments, bondholders are guaranteed a return of the principal as well as interest payments and still get paid even if a company goes bankrupt and liquidates.

Most stock is common stock, which is shares of a company's profits. Investors have one vote per share in electing the board members who make management decisions. Through capital growth, common stocks yield higher returns than virtually all other kinds of investments. However, they also entail the greatest risk, notes Investopedia. Preferred stock does not have the same degree of ownership or voting rights as common stock, but usually guarantees a fixed dividend. In the event of a liquidation, preferred shareholders are paid off before common stock owners.

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