What are stocks?
Brief and to the point, stock (share or equity) is a part in the possession of a commercial entity. As you obtain more stocks, your ownership share in the business rises.
Possession of a firm's stock means that you are one of the many other shareholders and that you have a pretension (although as usual very inconspicuous) to everything the company owns. As an holder, you have a right to part of the business incomes as well as any voting rights applied to the stock.
The ownership of a public company does not mean you take part in the everyday activity of the business. Instead, you have right to vote on the election of the board of directors at yearly meetings.
Earnings are often paid out in the form of dividends. The part of the profits you get depends on the quantity of the shares in your possession. Your demand on assets is only available if a company goes insolvent. In case of liquidation, you'll get what's remain after all the borrowings are paid.Another highly significant feature of stock is its bounded responsibility, which means that, as a holder of a stock, you are not personally liable if the company can not pay its debts.
Why does a company float shares?
Why would the founding parties share the incomes with thousands of traders when they could keep gains to themselves?
The reason is that every business have to raise money. To realize this, companies can either borrow it or get it by putting up to sale part of the business, which is known as issuing shares. Both methods correspond to debt financing.Issuing stock is profitable for the company because it does not claim to refund money or make repayment of interest. All that the shareholders receive is the hope that the value of stocks will someday become more than it was earlier. The first selling of equities, which is issued by the private company itself, is called the initial public offering (IPO).
Risks for stock investors
It must be pointed that there are no assurance when somebody decide to invest money in stocks. Some companies pay out dividends, but that is inconstant practice. Without dividends, an investor can make profit only through placing of shares in the open market. On the other hand, any stock may fall in value, in which case your investment will become a letdown.
Although risks exist, the great return on your investment sounds positively. And that is the main reason why stocks are more advantageous than bonds or savings accounts. In the long run, an investment in stock markets has historically had an average refund of around 10-12%.