Answer1:
If the company does well, or even if everyone thinks the company is going to do well, the price of the stock goes up. This is how stockholders make a return on their investment. Conversely, if the company does poorly, then the shares decrease in value, and the stockholders lose their investment.In addition, many companies give a little dividend payment each year to the stockholders, providing extra income.
Answer2:
A stock (also known as an equity or a share) is a portion of the ownership of a corporation. A share in a corporation gives the owner of the stock a stake in the company and its profits. If a corporation has issued 100 stocks in total, then each stock represents a 1% ownership in the company.
For example, let’s say that we added up all of Widget Inc.’s assets, or the things that Widget Inc. owns—computers, office buildings, etc.—and the value of everything came to $1,000.00. Then let’s say for argument’s sake that Widget Inc. issues 1,000 shares of stock for people to buy. If you buy one share of Widget Inc., you own 1/1,000 of everything that Widget Inc. owns.
TYPES OF STOCKS
A company’s stock offerings generally fall into one of two categories:
i)Common stock
ii)Preferred stock.
Common Stock represents the basic equity ownership in a corporation. For total return (dividend income and capital gains), no publicly traded investment offers more potential over the long term than common stock. Stockholders are entitled to vote for directors and other important company matters. They also participate in the appreciation of share values and in any dividends declared from corporate earnings that remain after debt obligations and preferred stock dividends are met.
Preferred stocks is an equity which has characteristics of both bonds and common stock. Because it is not debt, however, it still carries more risk than bonds. The dividends on preferred stock are usually a fixed percentage of the par, or face, value. Thus, like bonds, shares are sensitive to interest rate fluctuations. Prices go up when interest rates go down, and vice versa. Preferred dividends are not a contractual obligation of the issuer, however. Although, as stated previously, they are payable before common stock dividends, they can be skipped altogether if corporate earnings are low. Also, if the issuer goes bankrupt, though the claims of preferred stockholders come before those of common stockholders, neither will share in any liquidated assets until bondholders are paid in full, because bonds are debt. Listed below are several types of stocks which are commonly traded in the securities market:
- Blue chip stocks are stocks of well-established companies that have stable earnings and no extensive liabilities. They have a track record of paying regular dividends, and are valued by investors seeking relative safety and stability. The name comes from the blue-colored chips in the game of poker, which are typically the most valuable.
- Penny stocks are low-priced, speculative and risky securities which are traded over-the-counter (OTC); i.e. outside of one of the major exchanges.
- Income stocks offer a higher dividend in relation to their market price. They are especially attractive to investors who are looking for current income that will gradually grow over the years as a way to offset inflation.
- Growth stocks are securities which appreciate in value and yield a high return. Their profits are typically re-invested to expand the business. Investors gain because the stock prices increase as the business grows, thus increasing the value of the investment.
- Value stocks are securities which investors consider to be undervalued. They feel that the stock is being traded below market value, and they believe in the long-term growth of the issuing company.
| Stock Type | Example 1 | Example 2 | Example 3 |
|---|---|---|---|
| Blue chip | IBM | GM | AT&T |
| Secondary | Teledyne | BancOne | Best Foods |
| Income | Bell Atlantic | General Electric | Con-Ed(ison) |
| Growth | Wal-Mart | AOL | EMC |
| Penny | Somanetics Corp. | Explorer Technologies, Inc. | Amistar Corp |
Dividends
When the company makes money, so do you—if you are a shareholder. The portion of a corporation’s after-tax earnings that is distributed to stockholders is called a dividend.Companies can certainly lose money too, in which case there would be no dividends. You would not, however, have to pay out any money, although the value of the stock would drop as any company that is losing money is obviously less valuable.