Stocks: A Basic Outline of What They are and What Whey are Not

Terms like “stocks”, “shares”, “bonds”, “dividends”, etc are terms that you will probably hear a lot if you venturing into the world of investments. Most people however do not really know what these terms actually mean. Hence they tend to misuse them a lot. Hopefully after reading this article, you will know better.

What are stocks? They are basically certifications or security that shows or proves that a person has a legitimate claim on a part of a corporations assets and consequently, earnings. They are declared by companies when they need to raise capital for a new project or to grow an already existing business.

They can be bought through two major ways; directly from the company during the IPO (Initial Public Offering) or on the secondary market from a shareholder selling his/her shares.

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The two major types of stocks are; common stocks and preferred stocks. The difference between them being that common stock gives the owner voting rights at shareholder’s meetings while preferred stock does not. Common stocks gives you voting rights as well as a right to receive dividends from the company’s earning. Preferred stock on the other hand does not give you voting rights, but rather gives you a larger claim on the assets and earnings of the company than common stocks give. The implication of this is that owners of preferred stock are entitled to receive their dividends or earnings before owners of common stock. Also, if the company goes bankrupt, it would have to settle the preferred stock owners first before the common stock holders.

As earlier stated, preferred stock owners are placed on a higher pedestal in cases concerning earnings or dividends. If a company has to be liquidated, preferred stock owners have a prior claim to its assets. In any case, they are still subordinate to bondholders.

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Stocks # Disclaimer.

Most people mistake stock holders for owners of corporation. You should know that owning shares or stocks in a company does not translate to owning the said company. Yes, you are entitled to the profits the corporation makes and yes, the more money the corporation makes the more money you earn from it. But this still does not mean it is correct for you to address yourself as one of the owners or owner of the said corporation.

Stocks # What then is the implication?

If the company/corporation goes bankrupt, its assets may be sold to pay up debts but not the assets of its shareholders. This means if you own shares in a company and the said company goes broke or goes into debt and is being sued for it, your personal assets are not at risk. You are not even supposed to, or expected to start running around to help pay the company’s debts. Also, if you as a shareholder needs money, you cannot sell off the company’s assets to raise money for yourself.

Stocks # So why bother owning stocks?

What shares or stocks gives you entitlement to are;

  • Dividends from the company’s earnings
  • Voting rights in shareholder meetings, although as earlier stated the voting rights is dependent on the type of stocks you bought.
  • The right to sell your shares to someone else.

So the correct thing to say would not be that you own 50% of a company but rather 50% of a company’s shares. The more shares you own, the more dividends you are entitled to.


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