Stocks

Stocks are a type of security that gives stockholders a share of ownership in a company. Stocks also are called equities.

Why do people buy stocks?

Investors buy stocks for various reasons. Here are some of them:

• Capital appreciation, which occurs when a stock rises in price
• Dividend payments, which come when the company distributes some of its earnings to stockholders
• Ability to vote shares and influence the company

Why do companies issue stock?

Companies issue stock to get money for various things, which may include:

• Paying off debt
• Launching new products
• Expanding into new markets or regions
• Enlarging facilities or building new ones

What kinds of stocks are there?

There are two main kinds of stocks, common stock and preferred stock.

• Common stock entitles owners to vote at shareholder meetings and receive dividends.
• Preferred stockholders usually don’t have voting rights, but they receive dividend payments before common stockholders do, and have priority over common stockholders if the company goes bankrupt and its assets are liquidated.

Common and preferred stocks may fall into one or more of the following categories:

• Growth stocks have earnings growing at a faster rate than the market average. They rarely pay dividends and investors buy them in the hope of capital appreciation. A start-up technology company is likely to be a growth stock.
• Income stocks pay dividends consistently. Investors buy them for the income they generate. An established utility company is likely to be an income stock.
• Value stocks have a low price-to-earnings (PE) ratio, meaning they are cheaper to buy than stocks with a higher PE. Value stocks may be growth or income stocks, and their low PE ratio may reflect the fact that they have fallen out of favor with investors for some reason. People buy value stocks in the hope that the market has overreacted and that the stock’s price will rebound.
• Blue-chip stocks are shares in large, well-known companies with a solid history of growth. They generally pay dividends.

Another way to categorize stocks is by the size of the company, as shown in its market capitalization. There are large-cap, mid-cap, and small-cap stocks. Shares in very small companies are sometimes called “microcap” stocks. The very lowest priced stocks are known as “penny stocks”. These companies may have little or no earnings. Penny stocks do not pay dividends and are highly speculative.