What are stocks?

There are two major types of analysis for predicting the performance of a company’s stock – Fundamental and Technical. The latter looks for peaks, bottoms, trends, patterns, and other factors of a stock’s price movement. It is a technique many people attempt, though very few are truly successful.

Today, the world of technical analysis is huge. There are literally hundreds of different patterns and indicators investors claim to be successful. Trying to keep this tutorial short was no easy task, but we will try our best to scratch the surface and introduce you to some major technical analysis tools.

 Stock Basics

Unless you have been living on the moon, chances are you’ve already heard something about stocks and the stock market. It usually comes in the form of something like: “Bob’s cousin made a killing in XYZ company” or “watch out with stocks, you can lose your shirt in a matter of days!”.

The fact is, most people don’t truly understand what a stock actually is or what it means. Contrary to what many think, stocks are not a game or even a form of gambling, if you learn the basics. The next few pages will introduce you to stocks and give you a good foundation to understand future lessons.

What are Stocks?

Stocks are sometimes referred to as shares, securities or equity. Plain and simple, a stock is ownership in part of a company. For every stock you own in a company you own a small piece of the office furniture, company cars, and even that lunch the boss paid with the company credit card. More importantly though you are entitled to a portion of the company’s profits and any voting rights attached to the stock. With some companies the profits are typically paid out in dividends. The more shares you own, the larger portion of the company (and profits) you own.

In addition to owning part of a corporation, owning stocks allows you to utilize the power of compounding, that is, to earn a return on top of returns. Compounding is part of the reason that over the past several decades stocks have outperformed practically every other investment tool. A great example: 1 share of General Electric in 1928 would be worth $630,900 today!

Money case

You might be asking yourself why a company would want to issue stocks? Why share the profits with thousands of people when they could keep profits to themselves. The reason companies issue stock is to raise money (called equity financing). By selling some ownership in the company in the form of stocks they get money that can be used for expansion, upgrading equipment, marketing, etc. The other method of raising money is through debt financing (bonds/credit), equity is more popular for raising money because there is no interest payments like there from taking on debt.

Different Types of Stock

There are two main types of stocks: Common Stock and Preferred Stock.

Common stock is just that, “common”. The majority of stocks trading today are in this form. Common stock represents ownership in a company and a portion of profits (dividends). Investors also have voting rights (one vote per share) to elect the board members who oversee the major decisions made by management. In the long term, common stock, by means of capital growth, yield higher rewards than other forms of investment securities. This higher return comes at a cost as common stocks entail the most risk. Should a company go bankrupt and liquidate, the common shareholders will not receive money until the creditors, bondholders, and preferred shareholders are paid.

Preferred Stock represents some degree of ownership in a company but usually don’t have voting rights (this may vary depending on the company). On preferred shares investors are guaranteed a fixed dividend forever, rather than the variable dividend that common stocks receive. However, one advantage is in the event of liquidation they are paid off before the common shareholder (but still after debt holders). Preferred stock may also be callable, meaning that the company has the option to purchase the shares from shareholders at anytime, and usually for a premium.