What does it
mean to own stock? Basically it means that a stock holder has a share in the
company it holds stock in. In a sense the stockholders own a piece of the company
that it has stock in. Stock shares are traded, bought and sold at a stock exchange
such as the New York Stock Exchange which is the best known, but by no means
the only stock exchange. Stocks are a type of security, Securities are instruments
giving to their legal holders rights to money or other property. Securities
include stocks, bonds, notes and mortgages.
How does one get to
own stock? Usually stock is obtained through a stock broker. Let's say you wish
to own a piece of Disney or Coca-Cola. You would call a stock broker and
he would tell you how much a share in the company would be. He would then place
an order for the stock for you. When the stock is purchased, the broker would
keep a stock certificate that shows that you are the legal owner of the stock
until you choose to sell it.
What are the advantages
of owning stock? One is that it allows the stock owner to share in the profits
of a company. These profits come in the form of dividends, which are allocated
according to how much stock one holds in the company. Of course one of the disadvantages
is that one can lose money if a stock's price goes down.
What makes stock prices
go up and down? There are many reasons: how much profit or loss a company has,
the time of year, good or bad publicity about the company, how the economy is
doing in general, etc..
There are several
different kinds of stock. Preferred stock is a type of stock in which the stockholder
gets a certain percentage of dividends each year based on the profits of the
company. Common stockholders get dividends based on the remainder of the profits
after preferred stockholders have been paid their dividends.
Another way
to purchase stocks is through mutual funds. A mutual fund is an investment company
that continually offers new shares and buys existing shares back at the request
of the shareholder and uses its capital to invest in diversified securities
of other companies. An investor puts money into a mutual fund and then the company
invests the money on behalf of the investors.
What are bonds
and how do they differ from stocks? A bond is a
certificate of debt issued by a government or corporation guaranteeing payment
of the original investment plus interest by a specified future date. Basically
one is making a loan to the government or corporation and gets paid a sum of
money in the future for letting the government or corporation borrow the money.
Bonds are one way the government raises money besides taxes.
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