What are Stocks and Shares?
Stocks and Shares are an element of a company’s ownership, but can they possibly allow you to walk out with a chair from its office?
You’ve all probably heard of shares and how they are like owning a part of a company. If that’s true then you should be allowed to barge into a company’s office and leave with some desks and shelves the moment you’ve bought the share, right?
Not really. That’s because you “owning a part of the company” is both true and not. The misleading bit is that the law treats the company or corporation as a separate entity or its own person that has separate property to the property of the shareholders. This limits their exposition in the case of a company going bankrupt.
So unfortunately you cannot walk out with a chair from the office if you’re a shareholder however
When you buy a share you purchase a portion of the company’s profits each year. If the company pays out dividends from its profits you get a share in that.
Most corporations don’t pay dividends, but would rather keep all the profits and reinvest them in the company. But you still win from that, because that means higher profits for next year, which translates to higher share price. You can then sell the share if you’d like for profit.
You might’ve started thinking by now: Ok, so there is value in buying stocks and shares, but what about management? How can I personally influence the corporation so that I can control the direction where the price of my investment will go to?
Well, owning shares gives you voting power on the shareholder meetings. And if you own the majority of shares you get to appoint the board of directors. Their job is to increase the value of the company.
A key point here is how you buy shares – either in the initial public offering (IPO) or from another shareholder in the secondary market. When a company issues stock it does so in exchange for cash which is used to grow the company. So issuing is like getting into debt for companies.
Hang on, what’s the difference between a loan and issuing stocks? Well, there is a substantial difference between stocks and bonds. A shareholder is not a creditor. If a company goes bust and starts getting liquidated its creditors who get their money from the sale of the corporation’s assets first and with a priority. Shareholders get compensated with whatever’s left.
If the company doesn’t go bust, the bondholder’s return is simply the bond’s interest, which is fixed through time. On the other hand, a share’s payoff could be limitless in theory as a company’s profits could be as high as it makes them.
So far history’s been on the side of shares. Stocks average 8-10% the past bazillion years, while bonds – just 5-7%.
How can you create wealth through buying stocks?
This can be broken down in to three different categories
- Receiving an income from your stocks in the form of dividends, as explained above some companies may not offer dividends but the biggest companies in the world often do because the profit is too much to simply invest it back into the business, therefore this money gets paid to shareholders in the form of dividends.
- To hope for a growth in the company and the value of your shares and later sell them for a profit.
- A combination of the above which is known as a balanced stock.
Is it Risky to buy stocks and shares?
Investing in stocks offer you a choice, you have different levels of stocks that can be either less risky or more risky depending on what you choose. For example AIM listed stocks (formerly the Alternative Investment Market) are smaller, less-viable companies which float shares with a more flexible regulatory system than is applicable to the main market. These tend to be seen as riskier stocks but if you manage to get it right and you could see the profits soar for example if you invested in ASOS plc when listed back in 2002 you would have seen a 29000% increase!
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