‘Stock’ is a word of many definitions: a shop’s inventory, a cube you cook with, a collective term for farm animals – but when we talk about stocks in finance, many people are a little less sure of what it means.
In finance, stocks represent a fraction of ownership of a company, so if you own a physical stock, you own a piece of that business! Traders and investors can buy, sell and trade stocks, or watch the value rise or fall in their portfolio. In its most simple form, an investment in the stock of a company is a speculation that the company will be successful in the future.
How Do the Stock Markets Work?
For the most part, stocks are bought and sold on the stock markets. There are over 60 different stock markets in various countries around the world, with the largest being the New York Stock Exchange, which has an equity market capitlisation of more than $25 trillion USD. Other large stock markets include the NASDAQ, the London Stock Exchange and the Hong Kong Stock Exchange.
When you trade stocks on a stock market, you are acting as either the buyer or seller of a stock. Since there is a finite number of shares in a company, the price of the stock is determined by the supply and demand for that stock. If there is a high demand for the stock, and investors are buying shares, then the total supply of shares falls, making the stock more valuable.
Stocks Example
There are tens of thousands of different stocks trading on any of the major exchanges. Stocks are being traded around the world at all hours of the day by millions of traders. Generally speaking, investing in industry leaders and blue-chip companies with strong fundamentals is a popular way to grow your investment over time (though not always a guarantee!). There are some investors who prefer riskier plays like growth stocks, which are usually companies that have yet to meet profitability and are trading higher based on future speculation. Mega-cap tech stocks are some of the most popular investments, with companies like Apple, Amazon, Alphabet, Microsoft, Facebook, Tesla, and NVIDIA providing some of the highest upside and safety on the markets.
What Are the Different Types of Stocks?
There are two main types of stocks available to investors: common and preferred. In general, common stocks are the ones that ‘regular’ investors own. These give you the right to vote at shareholder meetings, allow you to receive dividends, and give you a proportionate amount of the company.
Preferred stocks come with more exclusivity. These shareholders do not get to vote, but are entitled to a greater share of dividends and assets distribution. Another perk of preferred shares is that if the company ever gets liquidated, preferred shareholders have a greater claim on assets than common shareholders.
In CFD trading, since you do not actually own the underlying shares, CFD traders do not have to worry about things like shareholder meetings. Interestingly enough, if you own a CFD of a stock you do get paid dividends, and since you are affected by the stock’s price, you should be aware of things like quarterly earnings reports which could potentially have an effect on the underlying stock price.
Related Articles
- What are Blue Chip Stocks?
- What is a Fractional Share?
- What is Market Capitalization?
- What is Short-Selling in Stocks?
- What is Liquidity?
Disclaimer
Eurotrader doesn’t represent that the material provided here is accurate, current or complete, and therefore shouldn’t be relied upon as such. The information provided here, whether from a third party or not, isn’t to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product or instrument; or to participate in any particular trading strategy. We advise any readers of this content to seek their own advice.
