By Kori Eskridge, Fall 2014 Student Intern
Stock is a common phrase in everyday investing, although many people do not know much about what stock actually is. When investing in stock, you are actually buying small pieces of ownership in a company. As a partial owner, you are eligible to receive money back on your investment through the receipt of dividends or capital gains. Dividends are portions of profit that are paid back to investors from the company when the company is profitable. Capital gains earn a return when you trade a stock for a higher price than you paid for it.
There are two kinds of stock: common stock and preferred stock. Common stock is issued by all publicly traded companies. There is a higher level of risk because the price per share fluctuates frequently and there is an increased chance of loss. On the other hand, common stock can produce great returns, because there is no price ceiling, meaning that the value of a share may increase exponentially. Companies with common stock often pay out dividends, although they are not required to do so.
Preferred stock, which is not issued by all companies, is typically considered a safer investment because there is less risk of losing money; however, there is also limited potential for returns. Preferred stock holders are typically guaranteed to receive a dividend, although the dividend amount is usually fixed. This means that while preferred stock holders are ensured to receive a specific dividend, common stock holders may receive a much higher dividend if the company is particularly profitable. Additionally, while there are still price fluctuations in the price per share, preferred stock prices stay relatively steady, which can provide a safer investment than common stock but might result in less profit.
While the stock market can be volatile and a little difficult to navigate for novice investors, a little planning and patience can go a long way toward making your stock investments work for you. For more information about stock and other investment options, click here.