Ever wanted to start investing some of your savings but have no idea where to start? What even exactly are bonds? Why are there different types of stocks? How can I make sure I don’t throw away my money? The first part of this series will begin with the basics: what stocks are, types of stocks, buying and selling stocks.
What stocks are
Stocks, also known as equities, are securities that issue one a piece, or a share, of ownership of a company. Stockholders do not own a company, but rather, only own the shares issued by that company. Owning a share or stock of a company entitles one to vote on company matters and receive profits that the company may make. The more stocks one owns, the more power and profit one is entitled to. The buying of stocks allows a company to grow capital, grow the business, pay off debt, or expand to new regions. Go here for a more in-depth look at what stocks.
Types of stocks
-
Common stocks: typically the main type of stock people buy, represent ownership of a company, can claim a portion of profits (but consistent profit is not guaranteed) and get one vote per one share/stock
-
Preferred stocks: almost always do not include voting rights, typically includes a fixed dividend (sum of money/profit) regularly, pays off the shareholders if liquidation occurs and company can purchase the shares from holders at any time for any reason
Under the two main types of stocks, certain stocks can fall under different classes or categories. A company can tailor their stocks to fit their voting and dividend policy. The different categories are growth, income, value and blue-chip stocks. Find the details on each category here.
Photo by Aditya Vyas on Unsplash
Buying stocks
Just as there are different types of stocks, there are different ways to buy stocks. The four main ways to buy are as followed:
-
Direct stock plan: You buy and sell directly through the company. Without having to pay a broker, an investor saves on commission, but some other fees may apply. These plans may require a minimum amount for purchases and will not allow one to buy at a specific price or time. The company will buy or sell plans at a set time (daily, weekly, or monthly), so one can have the cost taken out automatically from his or her savings account.
-
Dividend reinvestment plan: You can take the stock you currently have and reinvest the money into the company again. A signed agreement between the investor and company is required, and a charge for this may occur. Brokers typically are involved, which will cause more fees and charges.
-
discount/full-service broker plan: A broker is responsible for all buying and selling for investors, and they earn a commission from their customers.
-
Stock funds plan: These stocks are purchased through a broker or directly. They are offered by investment companies and are usually focused on a specific category of stock (as the ones mentioned above).
Covering these basics will help us understand the more intricate and complex aspects of stocks. On the next Adulting with Abby, be ready to learn about the differences in stocks and bonds and ways to actually execute investments.