• Category
  • >Financial Analytics

What are Stocks and How Does One Make Profit From Them?

  • Ashesh Anand
  • Mar 24, 2022
What are Stocks and How Does One Make Profit From Them? title banner

Historically, one of the most essential paths to financial success has been through stock market investing. The term "stock" refers to a share of a company's ownership. Each share is worth a particular amount dependent on the company's overall value. When you purchase shares in a company, you are effectively purchasing a small chunk of a public corporation.


As you begin to examine stocks, you'll see that they're frequently mentioned in terms of several stock types and classifications.


What are Stocks?


A stock is a financial instrument that represents a company's ownership stake. When you buy a share of a firm's stock, you're buying a small piece of that company.


Investors buy stocks in firms they believe will appreciate in value. If this occurs, the value of the company's stock rises as well. After that, the stock can be sold for a profit. A shareholder is someone who owns stock in a company and is eligible to claim a portion of the firm's remaining assets and earnings (should the company ever have to dissolve). 


A stockholder is another term for a shareholder. In modern financial jargon, the phrases "stock," "shares," and "equity" are all interchangeable. Investors can purchase and sell individual shares of a corporation on the stock market, which consists of exchanges.


Issuing stock is a way for businesses to generate funds to expand and invest in their operations. Stocks are a tool for investors to grow their money and surpass inflation over time.


Watch this | How does the stock market work? - Oliver Elfenbaum

What is the process of investing in stocks?


Companies raise funds by selling shares in their company. They then put that money to work on a variety of projects: a company may utilize money raised through a stock offering to support new products or product lines, invest in expansion, expand operations, or pay down debt.


Companies usually sell their stocks to raise capital, which they then utilize to expand or improve their operations. An initial public offering (IPO) is when a public company sells stock for the first time (IPO). After purchasing shares through an initial public offering (IPO), you can opt to resale them on the stock market.


The price of shares is determined by supply and demand, which implies that the lower the price, the more people selling the same sort of stock. Conversely, the higher the price, the more people who want to acquire the stock.


What is the maximum number of shares a company can have?


The smallest number of shares that a corporation can issue is one, which may be the case if the company is solely owned by one person. However, because there is no common limit on how many shares a business can issue, this can differ from one company to the next.


As corporations issue more stock or buy back shares from investors, the quantity of accessible shares might change over time.


Different Types of Primary Stocks


Stocks are divided into two categories: common and preferred stocks.


  1. Common Stocks


The Dow Jones Industrial Averages and the S & P 500 indexes track common equities. When they are traded, their value changes. The board of directors, mergers and acquisitions, and takeovers are all things that common stock owners can vote on.


Common investors, on the other hand, are last in line for a payout if a firm goes bankrupt and liquidates its assets, behind bondholders and preferred stockholders.


  1. Preferred Stocks


Preferred stocks are similar to common stocks in that they indicate ownership in a firm but do not have voting rights. Because dividend payments are set, holders know the exact amount of return they may expect. Preferred stocks can be exchanged for another type of stock.


Also Read | Types of Bonds


Advantages and Disadvantages of Stocks


Some notable advantages of Stocks are as follows :


  1. Stocks provide the best long-term growth (capital appreciation) opportunities for investors. Investors who are willing to continue with stocks for a long time, say ten years, have typically seen high, positive returns.


  1. When a firm declares bankruptcy and liquidates its assets, ordinary stockholders are the last to receive a part of the revenues. Bondholders will be paid first, followed by preferred stockholders. If you own common stock, you will receive whatever is left over, which may be nothing.


A few significant disadvantages of Stocks are as follows :


  1. Stock prices, on the other hand, might go up as well as down. You can lose money investing in stocks since there's no guarantee that the firm whose stock you own will grow and prosper.


  1. If you buy stocks, you'll have to put in a lot of time because the most profitable investments are often long-term rather than short-term. Because the stock market is unpredictable, you can never know how well your assets will do. If you invest in a single company, there's a danger you'll lose all of your money since you don't have enough other stocks to compensate for the loss.


  1. Even if a company isn't in risk of going bankrupt, its stock price can go up and down. Large firm equities, for example, have lost money approximately one out of every three years on average. You will lose money if you have to sell shares on a day when the stock price is lower than the amount you paid for them.


Also Read | Bankruptcy in the context of US


Distinction between Stocks and Bonds


Stocks are ownership holdings in a firm, whereas bonds represent a company or government debt. When a firm, government, or other entity issues a bond, they're basically "loaning" money to them by issuing debt with a promise to pay interest. 


They typically pay interest to investors on a yearly basis while gradually repaying their debt. As a result, bonds are frequently thought of as a safer sort of investment for short-term investors.


The process of selling stocks and bonds differs as well. Stocks are traded on international stock exchanges such as the New York Stock Exchange in the United States and the London Stock Exchange in the United Kingdom. Bonds are often sold through a regular brokerage rather than on exchanges.


Also Read | Debt Funds



What is the best way to profit from stocks?


In general, there are two options here: 


  1. Stock Price Appreciation


As a company's earnings and future prospects improve, its stock price will normally climb. Earnings growth is a primary driver of stock values over the long run, therefore it's critical to choose companies with strong businesses.


  1. Dividends


Some businesses also distribute dividends, which are a mechanism for them to distribute a portion of their revenues to shareholders. These regular payments, which are usually given quarterly, can account for a significant amount of an investor's long-term gains. 


If a corporation pays a 20-cent dividend every quarter and you own 10 shares, each payment will net you $2. Stock dividends, albeit uncommon, can be paid to shareholders in the form of additional shares.


Also Read | Largest Stock Exchanges in the World


Watch this | What are Stocks and How do They Work?

Investing in stocks allows you to benefit from long-term capital growth. Dividends paid out by the corporation are another way to benefit. At the same time, if you wish to sell your shares, you can do it swiftly. If you are a major stakeholder in a corporation, you will have voting rights and a say in important business decisions.

Latest Comments