Stocks

What are stocks?

A share (also referred to as equity shares) of stock represents a share of ownership in a corporation. Stock typically takes the form of shares of common stock (or voting shares). As a unit of ownership, common stock typically carries voting rights that can be exercised in corporate decisions.

Preferred stock differs from common stock in that it typically does not carry voting rights but is legally entitled to receive a certain level of dividend payments before any dividends can be issued to other shareholders.

Convertible preferred stock is preferred stock that includes an option for the holder to convert the preferred shares into a fixed number of common shares, usually anytime after a predetermined date. Shares of such stock are called "convertible preferred shares".

Although there is a great deal of commonality between the stocks of different companies, each new equity issue can have legal clauses attached to it that make it dynamically different from the more general classes. Some shares of common stock may be issued without the typical voting rights being included, or some shares may have special rights unique to them and issued only to certain parties. Note that not all equity shares are the same.

When thinking about stocks, consider the words of Warren Buffett, Chairman of Berkshire Hathaway and one of the most influential heads of industry in modern American history. In an interview with Forbes magazine, Buffet said "the most that owners in aggregate can earn between now and Judgment Day is what their businesses in aggregate earn", less, expenses. He continued, "true, by buying and selling that is clever or lucky, investor A may take more than his share of the pie at the expense of investor B. And, yes, all investors feel richer when stocks soar. But an owner can exit only by having someone take his place. If one investor sells high, another must buy high. Indeed, owners must earn less than their businesses earn because of 'frictional' cost, (expenses)."

Investing in individual stocks is a favorite pastime of the wealthy, largely because they can afford to take such inherent risks. Today, thanks to mutual funds and 401-k plans, the average American is thought to be a participant in the stock market. Investing is personal, and investment risks should be carefully considered. However, regardless of the degree of volatility in the share markets at any particular time, a stock market-oriented individual may believe that it is always a good time to invest in particular stocks. This is the problem- sometimes you will be right. Sometimes the stock you selected and believed in may rise, but often it will not. Mutual funds provide diversification by investing in groupings of many stocks, which mitigates your risk. Click here to read more about mutual funds.

Stocks, by definition, are investment vehicles; they are by nature, market-sensitive. They offer upside potential, as well as downside risk. Understand that stocks, market-sensitive investments, never guarantee anything, not your original principal, and they do not guarantee dividends.  Account values made up of stocks; fluctuate in value, because that is how they work. They are one of the best vehicles for investing, along with mutual funds and variable annuities. These products are designed for potential, but you must be able to afford the risk. You should think of the money you are investing as discretionary. In other words, money you invest must be money you can afford to lose.