What Is Stock?
One of the many ways to invest for the short or long term is by purchasing stock. Most people that would like to create wealth look to diversify their cash holdings and invest their money in financial instruments that can earn interest, pay out dividends and grow in the long term.
Stocks are a form of financial instrument, where an investor can purchase a piece of a company. When you purchase stock in a company, you are literally purchasing ownership in that company.
There are usually two different types of stocks issued by a company and they include common stocks and preferred stocks. Common stocks are usually the most popular types of stocks sold by a company. They include voting rights (usually 1 vote per share) and take part in the company’s earnings. Common stocks are usually considered the best vehicle for investment due to their charted growth over the many years.
However, owning stock does come with its own risks. As a stock holder, you can lose your entire or partial investment. As a stock holder in a company, if the company decides to go out of business, you as a common stock holder will not receive any money back unless every entity that the company owes money to gets paid first. In addition, preferred stock holders are always paid before common stock holders.
Preferred stock is similar to common stocks in that you own a part of the company, however you do not get the same percentage in voting rights. Another difference in preferred stock is that if you buy a stock that pays a dividend, the dividend amount will never change. Unlike common stock where dividends can rise and fall depending on performance. Preferred stock is also a less risky investment, due to the fact that if the company goes out of business and liquidates, preferred stock holders receive their money first, before all common stock holders, however always after the company pays off all its debts.