A stock market trading floor is a familiar sight filled with lots of activity designed to earn investors money. Scottrade rightly compares it to an auction house: here, it’s the buying, selling and trading of money invested by people into a business or enterprise that’s gone “public,” with the hope of earning them some financial returns depending on the organization’s ultimate success. When you purchase stocks (also called securities), you become a stockholder, a shareholder, with a small piece of ownership in a corporation. When that corporation makes money, you earn a profit according to the amount of funds you’ve invested.
The stock market is similar to the way we deposit money into a bank or credit union to earn interest; no average savings account will do. We want to find the product that gives us the best dividend yield on our investment. When placing money into stocks, the same principle applies — we like to pick ones with a proven track record of returning its investors a high return on the money they stake, or entrust, in a given company.
There are major stock markets all over the world where stocks and commodities are traded.
Before investing, there are two basic stocks to understand in the stock market today: common and preferred.
1. Common stocks. These comprise the majority of stocks held by people. A common share represents what we mentioned earlier: a small slice of ownership in an organization. So, while you won’t be able to make major decisions at Facebook, your purchase of stock in the company gives you dividends, and, according to Investopedia, voting rights, i.e. one vote per share to elect company board members.
There’s a great benefit to buying common stocks. They return higher yields than other savings and investment accounts. However, there are risks involved. For instance, if a company files bankruptcy or shuts down, common stock holders aren’t paid their dividends until creditors, bondholders and preferred shareholders receive their money, Investopedia says.
2. Preferred stocks. When looking at a stock market watch or stock market report online or on TV, you’ll often hear how stock in X or Y company has gone up or down. That’s because common stocks are variable — they fluctuate according to market conditions. With preferred stocks, dividends are fixed. Sort of like what you’d get with interest rates on a CD, for example, your returns on a preferred piece of stock won’t decrease. You’ll also be one of the preferred stock holders to be paid out before common stock holders if the company you’ve invested in has closed or liquidated. With that in mind, preferred stocks don’t give you voting rights.
Stocks should not be confused with commodities. A stock is essentially a document — a piece of paper — signifying your part ownership in an enterprise. A commodity is a basic good considered of equal worth regardless of its producer. Commodities can be coffee beans, aluminum or gold. Investing money in them is investing money in the physical item. With stocks, you invest in a company, which is not a commodity.
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