A stock is an equity security. It is essentially a unit of ownership where investors participate financially in the growth of a company’s earnings. When you buy stock, you're purchasing a small piece of that company, just like owning a slice of the pie. In general, there are two types of stock:
Types of Stocks:
- Common Stock: The most basic type of stock, granting basic ownership and voting rights.
- Preferred Stock: Offers a fixed dividend payout and priority claim on assets in case of liquidation, but usually no voting rights.
Ownership Rights:
- Dividends: When a company makes a profit, it can distribute a portion of those earnings to its shareholders. Dividends are approved by the company’s board of directors and not guaranteed.
- Voting Rights: Depending on the type of stock you own, you may have the right to vote on certain company decisions.
- Residual Claim on Assets: In the event of a company liquidation, stockholders have a claim on the remaining assets but only after creditors and bondholders are paid; therefore, stocks are generally riskier than bonds.
In addition to dividends, the main driver of most stock investments is the potential for capital gains:
- Price Appreciation: If the company performs well and consistently beats earnings estimates, the price of the stock may also rise. A strong economy and overall market optimism may also lift stock prices.
- Share Buybacks: The management of a company may return their capital to its stockholders in the form of buying stock on the public market, which consequently drives the stock price up.
Risk and Volatility:
Investing in stocks carries inherent risks like daily market fluctuation and the potential for poor performance of the company itself. If the company struggles to make a profit or goes bankrupt, the value of your shares may decline or become worthless.
Diversified stock funds, or “equity” holdings, offer investors a good inflation hedge and excellent wealth compounding effect over the long term, in our view. Understanding the main features can help you make informed decisions about your own investment strategies. There are low quality stocks and high-quality stocks both of which come with risk and price volatility; do your research and consult with an adviser on your investment objectives and risk tolerance before investing in a single stock or stock funds.
Important Information:
The views expressed in this publication are those of the author and do not necessarily reflect the views and opinions of Cetera Advisor LLC or Burrows Capital Advisors LLC. The information provided in this publication is for informational purposes only and is not intended as legal, financial, investment, tax, or professional advice. Nothing in this publication constitutes a solicitation, recommendation, endorsement, or offer by Burrows Capital Advisors LLC or any affiliated entities. This publication is based on research and analysis conducted under specific circumstances and may not be applicable to all situations. It is recommended that investors conduct their own analysis or seek professional advice before making any decisions based on the information provided in this publication. The authors and publisher do not guarantee the completeness or suitability of the information contained herein and disclaim any liability for any direct, indirect, or consequential loss or damages arising from the use of, reliance on, or interpretation of this information. Any links to external websites provided in this publication are for informational purposes only and do not imply endorsement or approval of the linked content. All rights are reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the authors and publisher. A diversified portfolio does not assure a profit or protect against loss in a declining market.
Investments in securities do not offer a fix rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions and, when sold or redeemed, you may receive more or less than originally invested. No system or financial planning strategy can guarantee future results.
Securities and advisory services offered through Cetera Advisors LLC, member FINRA/SIPC, a broker/dealer. Advisory services offered through Cetera Investment Advisers LLC. Cetera is under separate ownership from any other named entity. Burrows Capital Advisors, LLC, 2450 South Shore Blvd., Suite 220 League City, TX 77573.