Investing in stocks traditionally has been the best investment over time. But what does stock ownership mean? What does it entail? Where do you buy them?
When you own stock in a company you are a shareholder. Companies have many thousands even millions of shares. The entire ownership of the company is made up of these shares. If you own 5% of all the shares of a given company you own 5% of the company.
Advantages of Owning Stock
The main advantage of owning stock is that you can make a lot of money. In fact equity (stock) is historically the best type of investment to own. It is possible for stocks to grow quickly. Doubling your money in two or 3 years is not unheard of. However, the stock market’s average return since 1900 is 5.3% annually.
Owning shares in a public company is passive. This means that you can receive the benefits of being an owner without having to spend any of your time working for the company or making day to day decisions. As a shareholder, you can influence the company by casting your vote to determine the members of the board of directors. You get one vote for every share that you own. So, people who own many shares have more voting influence than those who only own a few shares. The board of directors makes major decisions like hires executive officers to run the company and determining the dividend rate.
Another advantage of owning a public corporation is limited liability. This means that you are not held personally responsible for the debts of the company. Legal judgments against the company will not apply to you.
Disadvantage of Owning Stock
The main disadvantage of owning stock is that the value of your shares can decrease. If the company you chose to own does not perform well its share price may plummet and you will not be able to sell your shares for as much as you paid for. In the worst of scenarios your company may go bankrupt and your shares will be worth nothing. This is why it’s important to read your company’s published financial statements each year.
Since the company is a separate legal entity you as a shareholder do not own the assets within the company. So the buildings are not yours to use at your discretion or the vehicles etc.
The Annual Report
Shareholders receive annual reports from the chairman of the board of directors reporting the health of the company. Quarterly reports are also sent to the shareholders. Some companies send more frequent reports than this but they are not required by law to do so.
Public companies are required by law to hold shareholder meetings at least annually to further discuss the health and future of the company. All shareholders may attend.
Stocks are Traded on Stock Exchanges
Shares of a company’s stock are traded publicly on exchanges. These exchanges are collectively called the “stock market”. The New York Stock Exchange or NYSE is the biggest in the United States. AMSE, Chicago is other exchanges in the US. Canada’s largest exchange is Toronto? The FTSE, German, Tokyo etc are prominent world stock exchanges.
A stock exchange’s purpose is to provide liquidity, or the ability to buy or sell your shares, at instant market prices. They match buyers with sellers even if they live very far apart.
The price of a company’s stock is determined by supply and demand. The level of supply and demand though is influenced by people’s perception of how good the future prospects of a company are. When a company is making a profit and the public is excited about the company’s future demand will rise causing the supply of the shares to fall and the price of the shares to rise as well. When a company is performing poorly the opposite happens. Demand falls, supply rises and price falls.
How Do Stock Investors Profit?
There are two ways to make money with stocks. The first is to buy shares of a company and then sell the shares for more money than you bought them for. This is where we get the phrase buy low and sell high. The second way an investor can make money with stocks is to buy the stock and hold it. If the company is turning a profit it will often pay a portion of that profit to the owners in the form of a dividend. Some companies pay dividends every year and some pay intermittently. Quarterly dividends are the most common but some companies pay only one annual dividend.
Where Can You Buy Stocks
Full Service Brokers
These are firms that advise individuals and groups on what investments to make. They will open an account for you and help you buy stocks or other alternative investments. You pay them for the advice and customer service they offer you. Merrill Lynch, Raymond James and Edward Jones are all notable examples of full service brokers.
These are online brokers. You open an account with them and place trades yourself. They do not help you make investment choices, but their commission charge is much cheaper. It’s normal to find discount brokers who will process trades for you at less than $10 per trade. Scottrade, E*TRADE, and ShareBuilder are common discount brokers.
Direct Purchase Plans
Another way to invest while paying very little in trading fees is to go directly through the company. If you go to the investor relations link on most company’s websites you will find information on how to open an account directly with them or their transfer agent. This manner is more appropriate for very long term investors who will be making regular purchases.
These days your stocks are kept in electronic registration. Physical certificates are a thing of the past. Sometimes you have to pay extra just to receive a paper certificate. There is no reason to have a physical certificate any more other than sentimental reasons. They only provide added cost, hassle and delay in your transactions.