The workings of a Stock Market

Stock market investing is scary to most people. However, these scared people are usually individuals who have limited stock investing experience. They have also heard horror stories of overage investors experiencing significant losses of their investments.

For example, this millennium’s bear markets promise vast rewards but seldom deliver. As such, it’s is not surprising that the investment sentiment pendulum swings back and forth between greed and fear in their eyes. Even though the stock market has its fair share of risks, the right approach could earn you good returns.

Definition of a stock

Stocks are financial instruments representing ownership in a corporation or company. Moreover, stocks represent a proportional claim on the corporation or company’s earnings and assets. Stocks are also referred to as the company’s equity or shares. You can check here for a list of popular stocks available for trading.

Stock ownership is the implication that a shareholder is the owner of a piece of the company. The percentage the shareholder has depends on the number of shares he bought. For example, an entity or individual owning 1000 shares of company A has a million owing shares. This would mean that the entity or individual had 10% stake ownership. Some companies even have outstanding shares running into the billions.

Stock types

Stocks can be divided into two:

Preferred
Common

The term ‘common’ is synonymous with equities as their trading volumes and combined market value are much larger than preferred shares. The key distinction between preferred and common stocks is that the latter normally has voting rights. These rights make it possible for the common shareholder to give their input in the company’s meetings like the AGM (annual general meeting). In AGMs, matters like auditor’s appointments or election of the board of directors are put to the vote.

On the other hand, preferred shares don’t come with voting rights. They are named so because preferred shareholders are given priority over the common shareholders as far as receiving dividends and assets (should there be liquidation) go.

Common stocks can also be divided depending on the voting rights. The basic premise is that common shares ought to have equal voting rights (a vote for each share held). However, some companies have multiple stock classes, with each class having different rights to vote. For example, Class A shares might come with ten votes for each share, and Class B shares might have a single voting right per share.

These structures are made to allow a company’s founders to control that company’s innovating ability, strategic direction, and fortunes.

Why are shares issued to Companies?

Corporate giants like Alibaba (founded in 1999) and Facebook (founded in 2004) started operating as small private entities but have become some of the biggest companies globally. Growing a company at such a pace needs you to have access to significant capital. Converting an idea to a corporate giant requires resources that cost money. That is why such companies sold some of their shares to be able to experience such growth.

Listing shares

Once a company has established itself, it will most likely need access to more capital, the kind of capital not obtained from conventional bank loans. So, what’s the next best thing? Selling its shares via an IPO (initial public offering).

Doing this will change the company’s status from being a firm whose shares are held by some shareholders to one whose shares are publicly-traded. IPOs also give early investors a chance to cash their stakes out and, by doing so, reap handsomely.

The moment the company’s shares are listed in the stock exchange, trading will commence, and its shares will fluctuate as traders and investors reassess and assess their intrinsic value.

Traders can make better decisions by logging onto trading platforms and looking at historical price charts. Many brokers, including Saxo Bank, offer detailed financial information on stocks so their traders can make the most informed decisions.

Benefits of listing in the stock exchange

Ready liquidity for the shareholder’s shares.
Additional funds are raised with issuing of more shares.
Stock options plans are easy to set up, thus attracting skilled employees.
Greater market visibility.
Listed shares can act as currency, thus enabling acquisitions.

Conclusion

Many studies show how stocks can generate returns on investments over a long period. Stock returns are obtained from dividends and capital gains. Any investor willing to swing the fences with stocks needs a high-risk tolerance. Investors who choose a more conservative route can choose stocks with a long history of paying generous dividends. It is also advised for all traders to obtain more info on various trading methods such as CFDs before placing live trades.