Stock Exchange for Dummies

If you are interested into the world of shares and stocks, first, you should know more about the stock market. The stock market, by definition, is a place where people can sell, buy, or trade stocks, or also known as shares, of different publicly held companies. The stock market or stock exchange is also called as equity market.

Being an integral part of the world’s economy, the stock exchange gives interested companies and investors the possibility and chance to transact capital to gain a definitive legitimate ownership level. Despite being called as such, the stock exchange offers more than mere equity trading. This also involves many other financial derivatives and securities based on numerous commodities, bonds, and currencies.

Stock prices are based on the earnings of a company. The stock price of a business that does well goes up while a poorly performing company will have a lower stock price. The stock exchange also relies on the general condition of the global economy.

Different Types of Stocks

There are basically two categories of stocks, namely preferred and common.

  • Preferred stock – It is a share of ownership in public companies offering owners with higher claim on the assets and earnings of the business than common stock. This is where the name of the stock is derived since it is preferred over the company’s common shares to receive assets and dividends in case of liquidation.
  • Common stock – This is a security that acts as ownership in the company. This gives a person the right of owning a part of the business without taking possessions. Common stockholders are often considered to be on the lowest part of the priority list as far as receiving any of assets of the company is concerned during unforeseen situations.

Another key difference of these two is the fact that common stocks, unlike preferred stocks, give the shareholder voting rights or the right to participate in different corporate actions.

It is important to note that in stock exchange, a share’s cost for both preferred and common stock can vary according to the overall performance and earnings of the company.

Why Invest in Stock Exchange

For starters, the stock exchange gives companies a chance to generate the much needed capital they can use as business funds. Issuing shares on stock exchange as an alternative to borrowing money can help prevent companies from incurring debts and paying their interest rates.

A strong stock exchange performance can also allow a company to acquire other companies with shares and stocks instead of doing this with money. In addition, there are company owners who may also seek the prestige and statues associated with publicly traded businesses.

Another reason to invest in stock exchange is the chance for investors to gain a share in the profits of the company. Considering how the stock exchange works, investors can win in either of the two ways – they can receive the stock’s regular dividends or resell the share they purchased earlier once the price surges.

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