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by Finage at December 30, 2023 4 MIN READ

Stocks

Quick Guide to Understanding a Stock

 

There are a lot of people out there who have heard of stocks and how valuable and lucrative they can be, but don’t know how to properly go about them. The space is naturally a complex one with success driven by knowing as much as you can as well as luck. While luck and timing are elements that can’t be controlled, seeing as the stock market is a volatile one, you can learn about the field, which begins with understanding stocks. Below, let’s look at several aspects of stocks, including a detailed look at what they are, their history and how the market operates!

 

Contents:

- Stocks and the market in a nutshell

- Information you’ll need

- Two types of stock

- Common terms used

- Compared to alternative assets

- Final thoughts

Stocks and the market in a nutshell

A stock is simply a unit showing ownership of a company, making the one who owns it a shareholder, which entitles them to dividends as well as decision-making privileges. The purpose of these units is to help companies raise capital, while also giving the ones who own them the ability to sell them for a profit via the numerous stock exchanges out there.

 

The concept as we know it can be traced back to the early seventeenth century, when East India Companies essentially revolutionized the idea, which would be further refined later on, with London coffee houses. This all led to today’s exchanges, whose evolution over time has contained many key events, some of which are as follows:

- The creation of the development of early stock exchanges from 1773-92, first UK Market

- The great depression during the 1920s

- The launching of US Markets in 1971

 

This all leads to what we have today, which is a broader space on which various exchanges allow for stock trading. The model has proven so successful that even currencies, commodities, and other assets, are also put up and traded similarly. Modern technology and the market have only improved things, as it allows for remote stock trading without the need for an old-school broker.

 

Information you’ll need

For those interested, there are a few things you’ll need to know, just to be certain of what you’re entering. First, is that the two types of stocks exist and they are the “common” and “preferred” varieties. Another thing to be conscious of and learn is the language, in the form of the jargon that you’ll encounter as you delve deeper.

 

Two types of stock

The common variety gives you some ownership of an organization. Accompanying this are several things such as voting rights that allow you some control of your investment.

 

The preferred variety on the other hand isn’t such that one needs to constantly have their hands on anything. On the contrary, they’re built for those investors who simply want returns in the form of dividends, which make them seem eerily similar to bonds, as you’ll see.

 

Common terms used

With a proper understanding of stock types now established, as much of the jargon as possible has to be known. Some key terminologies are as follows:

- Brokers: these are third-party entities that act on behalf of investors

- Stockholders equity: this is essentially an organization’s net worth and is calculated after all liabilities, as well as expenses, have been subtracted from the total value of assets

- Stock splits: these are measures that organizations take to increase the number of shares without affecting the market cap

- Public/free float: used to refer to stock that is traded publicly via an exchange

- Selling short: the selling of borrowed stock in the hopes of buying it at a lower price before delivery

Compared to alternative assets

The stock market contains more than just stocks, with bonds, futures, and commodities also being present. The ones most associated with stocks are bonds, which are similar to preferred stocks in that both offer dividends. However, bonds are debt-based and don’t have ownership of the company, while also not typically traded on the market, but rather over the counter.

 

Other assets such as futures are value-based. This means that they rely on their relationship with other assets such as currencies and their fluctuations.

 

Final thoughts

Now that you know just how stocks work, it's fair to say that you have a look into how to go about them, especially as a beginner although expert advice is always valuable. However, with well over 100 trillion dollars as a market cap, looking at stocks as just another way of making money, which it is, is a little narrow-minded.

 

In reality, the stock market is probably the best indicator of how the world’s economy is doing, which means it comes with great implications. In any case, it starts at the lowest level, which is the one unit that shows ownership and the volatile market it’s a part of.

 


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