What is Stock?
Stocks are a type of securities that signify proportional ownership in an issuing company. Stocks are sometimes called equity. Shares give shareholders the right to proportion of the company's assets and income.
Shares are generally sold and bought on the stock exchange . But shares are also sold privately. Stock transactions must follow government regulations intended to protect investors from fraudulent practices.
Historically, stock investments have outperformed most of the other investments in the long run. Stock investment can be done through online stock brokers or stock securities registered at the governing institution in a country.
A public company issues / sells shares in order to raise funds to run its business. Shareholders are like buying a small company and have the right to a portion of their assets and income. In other words, the shareholder is the owner of the publishing company.
What Does It Mean to Own a Company by Buying Shares?
Ownership of this company is determined by the number of shares owned by a person relative to the number of shares outstanding. For example, if a company has 1,000 shares outstanding and someone has 100 shares, that person means they already have and get 10% of the assets and income of the company.
Shareholders actually do not really own the company, they only own shares issued by the company. The point is that the company's office is full of chairs and tables belonging to the company, and not the shareholders.
This is important to know because company property is legally separated from shareholder property, which limits the responsibilities of companies and shareholders. If the company goes bankrupt, the judge can order all of his assets sold - but the personal assets in the form of shares are not affected.
The court cannot even force to sell shares, but the value of shares will drop dramatically. Likewise, if a major shareholder goes bankrupt, he cannot sell the company's assets to repay his creditors.
Types of Stocks
A. Types of Shares Based on Market Capitalization
Shares can be classified based on the company's market capitalization, which is the total share ownership of a company. This is calculated by multiplying the current price of the company's shares by the total number of shares outstanding in the market. Below are the types of shares based on market capitalization.
Large Cap. Stocks
It usually consists of Blue-chip companies which are well-established companies with large amounts of cash reserves they own. It is interesting to note that the larger size of a Large Cap company does not mean they grow faster.
The fact is that Small Cap companies tend to outperform them in the longer term. But the large cap stocks come with benefits that allow investors to get higher dividends compared to Small Cap and Mid Cap stocks.
Mid Cap. Stocks
These are shares of medium-sized companies that have medium market capitalization. These companies have names that are well known in the market. This company has growth potential, and stability which is usually favored by experienced traders in the stock market. Mid Cap companies have a stable track record of growth and are very similar to Blue Chip stocks. In the long run, this type of stock develops and grows well.
Small Cap. Stocks
Small Cap shares have the smallest capitalization in the market compared to other shares. This stock belongs to a small company that has a small market capitalization and has good growth potential in the future.
Investors are not interested in this type of stock dividend. Investors usually buy this stock because of price volatility, and can make significant profits with it.
As an investor we can buy this type of stock because these shares have low prices because it is still in the early stages of the company. However, there is no certainty about how companies will survive in the market because they are relatively new.
B. Type of Share Based on Ownership
Common Stocks and Preferred Stocks
Preferred shares offer investors a fixed amount of dividend each year, this is not like ordinary shares.
Preferred Stock Prices are not volatile like Common Stock. Preferred shares benefit from priority when the company has excess money to distribute. At the time of the liquidation of the company, it is the company's creditors, bondholders, debt holders who get priority over preferred shareholders.
Hybrid Stock
There are companies that offer Preferred Stocks with the option to convert them into Common Stock, on condition, at a certain point in time. This is known as Hybrid Stock, which is Preferred Stock which can be converted and may or may not have voting rights.
Stocks with embedded derivative options
Shares that come with an embedded derivative option mean that the shares can be 'callable' or 'putable' and are not generally available. 'Callable' shares have the option to be repurchased by the company at a certain price at a certain point in time. Likewise, 'putable shares' offer their holders to sell them to the company for a certain price and time.
C. Types of Shares Based on Dividend Payments
Growth Stocks
These stocks do not pay high dividends because companies prefer to reinvest their income so they can grow faster. Therefore, these stocks are called Growth Stocks.
The value of the company's shares rises with a rapid growth rate which in turn allows investors to benefit through higher price increases. This is perfect for investors who are looking for long-term growth potential. Keep in mind, this type of stock has a higher risk.
Income Stocks
Compared to Growth Stocks, Income Stocks distribute higher dividends in relation to stock prices. Higher dividends mean higher income. Therefore, this type of stock is called Earnings Stocks.
Income Stocks are shares of stable companies that are able to provide consistent dividends but this is also a company that does not promise very high growth. This means that the company's stock price may not rise much.
Income Stocks is a stock of choice for investors. This is a good investment for investors looking for a secondary source of income through stocks that are relatively low risk.
You can use Dividend Yield to find stocks such as Income Stocks that offer high dividends. Dividend Yield is a measure of the income you will get as an investor (earnings per share) of your investment.
This Dividend Yield figure can be obtained by dividing the dividend by the announced stock price. Dividend Yield is written as a percentage. For example, if the stock price is $1,000 and gives a dividend of $50 per share, the result will be 5 percent.
D. Types of Stocks Based on Fundamental
Investors who believe that the stock price must be equal to the intrinsic value of the company's shares, compare the price of the shares with components such as PER, company profits, etc. to reach the intrinsic value per share. This method is called Value Investing.
Overvalued Shares (Shares that are overvalued)
These are stocks with prices that exceed intrinsic value and are considered to be too high
Undervalued Shares (Shares that are valued low)
These types of shares are popular with Value Investors because they believe that the share price will rise in the future.
E. Types of Shares Based on Risk
Beta Stocks
Beta or measure of risk is obtained by calculating stock price volatility. Beta can be positive or negative. This shows whether the move is in harmony with the market or against it.
The higher the beta, the higher the risk quotient of the stock. This means that if the beta value is more than 1 it means that the stock is more stable than the market. Many investors with knowledge of this measure use it to make their investment decisions.
Blue Chip Stocks
Blue Chip shares are shares of companies that have lower liabilities and stable income and who pay regular dividends. The companies included are very large and well-known companies. This company has a long history of good financial performance and is a good choice for investors who are looking for safer investment paths.
F. Types of Stocks Based on Price Trends
Defensive Stocks
Defensive Stocks are stocks that are not so affected by economic conditions and are preferred when market conditions are poor. Food and beverage companies are a common example.
Cyclical Stocks
Cyclical Stocks is a company stock whose value is greatly influenced by economic conditions. This stock has a high price fluctuation. This type of stock grows quickly during a booming cycle but growth slows when the economy is slow. Automotive stocks are included in this category.
Profit Share Investment
1. Advantages of Economic Growth: Along with economic growth, so does company revenue. That's because economic growth creates jobs, which creates income, which creates sales. The greater the salary, the greater the drive to create consumption demand, which drives more income into the company's cash.
2. Outperforming Inflation: Historically, the average stock has an annual return of 10%. That's better than the average annual inflation rate of 2.9%.
3. Easy to Buy: The stock market makes it easy for investors to buy shares of an open company. You can buy it through a broker / securities, financial planner, or online. After we create an account at a security, we can buy shares in seconds.
4. Two Ways to Make Money: Most investors intend to buy shares at a low price and then sell it at a high price. They invest in fast-growing companies that pay attention to their value. It is attractive to daily traders and buy-and-hold investors. One group hopes to take advantage of the short-term trend, while the other group hopes to see the company's revenue and stock prices grow over time. These two types of investors believe that their stock picking skills enable them to outperform the market. Other investors prefer regular cash income. They buy shares of companies that pay dividends. These companies are growing at a moderate rate.
5. Easy to sell: The stock market allows us to sell shares anytime. Economists use the term "liquid" which means we can convert stocks into cash quickly and with low transaction costs. This fact is important if we suddenly need money quickly, although it cannot be instant. Because prices fluctuate, we can run the risk of loss.
Stock Investment Risk
1. Market Risk: Investment decreases in value because of economic developments or other events affecting the entire market.
2. Liquidity Risk: The risk of not being able to sell shares at a fair price and spending money when we want. To sell shares, we may have to accept a lower price. Another example is when stocks are not popular, it is very difficult to sell them.
3. Allocation Risk: The risk of loss because our money is concentrated in 1 share only. When we diversify stock investments, it means we spread the risk to various types of stocks.
4. Unexpected Risk: The risk that our investment can be disturbed due to unforeseen events, for example, job loss. This might force us to sell the investments we hope for the long term. If we have to sell when the market is down, we might lose money.
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