Stocks: What They Are and How They Work | Investment Guide

Actions: What they are and how they work. This is the main question that we at Invest In The Stock will answer today, thanks to this guide that will allow you to discover the role that shares play in the economy and in finance, and therefore understand how traders make money with shares .

Stocks, what are they and how do they work?

The shares are a financial instrument through which you obtain a stake in the ownership of a company, this type of company is precisely called a joint-stock company and is listed on the stock exchange.

Anyone can buy the shares of a publicly traded company, but why should he?

In principle, anyone who buys shares and becomes a shareholder of a small portion of the company whose shares are being bought does so in order to earn money on the shares in the medium to long term.

All publicly traded companies have a market trend subject to fluctuations which depend on several factors, including: The international context, internal changes on the administration of the company, the growth of competition, even the market sentiment influences the value of the actions.

Why invest in stocks

As anticipated a little, those who buy shares do so to obtain a profit in the medium to long term, this profit is only hypothetical, because no one can assure you that investing in shares generates real gains.

Profit is obtained from the difference between the purchase of the shares at a given moment, and the future sale of the shares when their value is supposed to have increased over time.

Practical example:

I buy 100 shares today worth 15 euros each, for a total amount of 1,500 euros, I sell them in 5 years when their value has grown to become 50 euros each, for a total amount of 5,000 euros, in this case after 5 years I will have earned 3,500 euros.

Now imagine much larger numbers than those just mentioned, and it is clear that there are large entrepreneurs and investors who can be enticed by the idea of earning a very large amount without doing practically anything.

However these people are assuming a very high risk by purchasing shares, this is because as mentioned no one guarantees that the company or companies in which they invest grow over the years, sometimes it also happens that they lose value or even go bankrupt, and in this latter case investors would lose their capital.

We also recall that the shares of joint stock companies are bought and sold on the stock exchange where they are listed.

Types of actions

When we speak of shares, we can generally only refer to three main macro categories, these are: Ordinary shares, preferred shares and savings shares.

What are ordinary shares

Ordinary shares are those that do not belong to any category, also called standard shares, are shares for which the shareholders have the right to participate in the decisions of the company, to vote in ordinary meetings, to participate in the distribution of profits and can also receive the liquidation of his share in the event that the company is dissolved.

In this case there are no particular privileges, they are standardized actions.

What are preferred shares

Preferred shares, on the other hand, mean types of shares that provide for privileges for subscribers. These privileges are indicated in the deed of incorporation of the joint-stock company, which indicates the type of benefit, the methods of disbursement, the timing for using it and the deadline for exercising it.

Generally it is a minimum guaranteed dividend, or the method of repayment in the event of dissolution of the company, etc.

If you hold this type of shares, you also have the right of precedence in the distribution of profits, however you have the right to vote only in extraordinary shareholders’ meetings.

What are savings shares?

Savings shares, on the other hand, are securities that enjoy financial privileges and differ from other types of shares in the lack of voting rights, and in the right to a higher dividend for all non-ordinary and privileged shareholders.

This type of share is reserved for savers, i.e. those users whose sole purpose is to collect the dividend at the end of the year and who have no interest in intervening and interfering in company decisions.

Thanks for being with us, this article on what stocks are and how they work ends here, if you found it interesting, share it via the social buttons you find below, see you soon and good continuation on our site!

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