What You Need To Know

About Owning Stock

While stocks confer owners some rights, they don't carry any responsibilities should the companies default or face lawsuits. In the worst-case scenarios the limits of the investor's liability is the stock becomes worthless.

Stock Trading

Stock trading is done on stock exchanges, such as the New York Stock Exchange (NYSE) or National Association of Securities Dealers Automated Quotation System (NASDAQ). Only companies listed on a public exchange have shares that can be bought and sold on the open market. You can also buy partial ownership in a smaller company not listed on a stock exchange, but that is an entirely different kind of investment than buying stocks.

Because stocks must be bought and sold through a stock exchange, individual investors need a broker to make the transactions. Brokers receive the buy or sell orders for specific stocks. The order may include detailed instructions on when to trade related to a certain price or simply buy now at whatever the price is. After receiving the order, the broker tries to follow through by locating a buyer or seller who is also represented by a broker. Both brokers receive a commission on the transaction.

Shares

Companies issue stocks to raise desired capital. They may want additional cash to expand the business or to purchase new properties. Each stock issue is limited to a certain number of shares. Once issued they are given a par value. The market then quickly adjusts that value according the perceived financial health of the company and its growth potential.

Investors usually purchase stocks when they believe a company will continue growing and will result in their shares growing accordingly in value. Those investors who buy stock in a new venture are taking more risk with the potential of greater gain. Anyone who bought Microsoft shares early on and held them eventually saw an enormous rise in their value.

Every share represents 1 vote. Shareholders are regularly asked to vote on important matters. Ownership also allows stockholders to benefit from company profits when there are any. The profits are distributed as dividends at the discretion of the company directors, and may be issued 1 or more times a year.

An Investment

When compared with savings investments, such as bonds or bank certificates of deposit, stocks have more earning potential, but with that they carry the risk of greater losses. But stock investments have several advantages over savings plans. Because they represent ownership in a company, they give stockholders the right to participate in the major decisions faced by the company.

When companies prosper the value of their stock rises and dividends increase. The downside is that when companies do badly, stock values may decline. Learning about the stock market and the various investment strategies can help minimize an investor's loss. Most investors find they do much better on the stock market than possible with any kind of savings investment.