LeoGlossary: Stocks
Also known as equity.
A security that represents fractional ownership in a corporation. Stock ownership gives one a right to the assets and profits of the company. This is dependent upon how many shares one owns.
One who owns stock is called a shareholder.
Stocks are traded on exchanges, which bring buyers and sellers together. The typical ones are the New York Stock Exchange (NYSE) or NASDAQ.
Businesses can use stock as a way to raise money. This is called "accessing the capital markets" (as opposed to the debt market).
There are generally two types:
- Common
- Preferred - often do not have voting rights yet have a higher claim to assets
Historically, stocks as an investment have outperformed other assets over the long run. The exception being Bitcoin which has a much shorter track record.
Publicly traded companies are regulated. In the United States, this falls under the supervision of the Securities and Exchange Commission (SEC). That is the agency responsible for ensuring companies adhere to the securities laws. When they go outside, the SEC will sue, bring civil litigation. If there is evidence of criminal activity, the Department of Justice will bring brought in.
Wealth Builder
Stocks are one of the primary vehicles that people use for building wealth. Over time, appreciation can result in massive financial gains. This is not, however, without risk. People can also suffer massive losses.
There are many examples where stock market bubbles were followed by collapses. The dotcom bubble was an example. In this situation, the NASDAQ crashed and took almost 15 years to recapture the pervious highs. The Crash of 1929 which kicked off the Great Depression is another example of a bubble bursting.
Those who invest in stocks long term tend to follow a similar path as Warren Buffett. Many consider him to be the greatest investor of all time. Buffett's basic approach is to find companies that he "never wants to sell". Through the use of good business practices, the company revenues and, in turn, profits keep increasing.
Buffett likes to look at his stock holdings as portions in a business.
Wealth is also generated by compounding, especially if dividends are paid. Many companies have payouts from the profitability equal to 2%-4% of the stock price. This can provide investors with a stream of income which can be reinvested in the company.
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