Stocks are an essential component of the global financial system. These are units of a company’s ownership. When you buy a stock of a particular company, you are buying a portion of the company’s ownership. The main goal of buying stocks is to earn profit from it when the prices rise.
Trading in the stock market and earning a profit requires considerable knowledge and practice. So, if you have just stepped into the stock market, understanding what a stock is, the different types, and how stock trading works will help you in the long run to become a successful trader. Fortunately, there is a wealth of information available that can help you find the hot stocks that could explode and learn how you can make the most of the opportunities.
But before you jump into the complexities of trading, start with the basics.
What is a Stock?
Companies raise capital to run their business by selling a share of its ownership, a stock. Equity is another name for ownership; most of the time, equities are used instead of stock. But both mean the same thing. Public and private companies issue stocks, and when you buy stock from these companies, you earn certain rights, too.
If you have a significant amount of stock or equities, you may have the right to vote in the company’s shareholder meetings. You may also receive a dividend from the profit made by the company if eligible. Moreover, when the company’s value is appreciated, the value of your stock will also increase, helping you make money from your investment.
Additionally, when a private company plans to sell its stock, it releases an initial public offering or IPO. So, the next time you read that a company is “going public,” it means it is releasing its IPO
Different Types of Stocks
Companies offer different types of stocks. These stocks are differentiated based on voting rights, dividends, and your rights if the company is bankrupt. Even though there are several types of stocks, the most common types are common and preferred.
Common Stocks: They are the most widely held stocks. In common stocks, the shareholder has voting rights in the annual meetings. This gives them the right to influence the company’s decisions. In some common stocks, shareholders may also receive dividends.
Preferred stocks: They are a hybrid stock somewhere between a common stock and a bond. Shareholders in preferred stocks have a fixed dividend payout higher than the dividend received in common stocks. When you invest in these stocks, you can claim the company’s assets if the company goes bankrupt.
In preferred stocks, there are no voting rights. However, they are less volatile and have fewer risks than common stocks. Apart from these two categories of stocks, there are also other types of stocks, such as growth stocks (companies that are growing), value stocks (companies that are undervalued), dividend stocks (companies that reliably pay dividends), Blue-chip stocks (big and established companies like Apple and IBM).
How does Stock Trading Work?
In the USA, stocks are traded on the New York Stock Exchange and Nasdaq. There are penny stocks that are traded on over-the-counter exchanges. But they are not mainstream stocks. The main aim of a stock trader is to buy stocks at a low price and sell them when the prices are higher.
When you decide to buy or sell a stock, you can do it yourself with the help of an online app or brokerage, or you can take the help of a financial advisor. There are different types of trade orders the trader can place:
- Market order: You can buy or sell a stock at the price the order was placed.
- Limit order: The trader specifies a price that a stock has to reach to buy or sell it.
- Stop loss order: A share is sold when it falls to a particular limit. This is to prevent loss.
- Day-only order: This order is effective only for the day the order is placed.
- Good until canceled order: This type of order is effective unless canceled.
Stocks play a vital role in the global economy. It is a great way to earn money if you are judiciously investing. So, if you are a beginner, don’t be afraid to indulge in stock trading. Soon, with some knowledge and experience, you can achieve significant gains.