A stock is a financial asset that represents an ownership share in a corporation. As a holder of a company’s stock, you are entitled to a claim on the corporation’s assets and earnings. How much of the corporation’s assets and earnings you own depends on the number of shares you bought relative to the number of outstanding shares. Thus, the more shares you own, the larger portion of the company’s assets and earnings you have claim to.
There are two types of shares – common shares and preferred shares. As a common shareholder, you are entitled to a pro rata share of any monies that the company pays out and you have the right to vote on important matters.
The second type of shares is preferred shares. As a preferred shareholder, the dividend payment is fixed at a definite amount and is paid before common stockholders. This differs with common shareholders as dividend payments are not guaranteed. Preferred shareholders also have priority over common stockholders on earnings and assets in the event of liquidation.
There are two ways in which you can earn money by investing in stocks:
- Through capital appreciation of the stock price and
- The payment of dividends.
The price of a stock is governed by the laws of supply and demand and will rise when the quantity demanded exceeds its supply. The second way in which you can earn money is through dividends. Companies distribute dividend payments as a way of sharing their profits with their shareholders. Dividends are usually in the form of cash whereby the company pays a certain percentage of profits to all shareholders.