An Introduction, Benefits And Risks of Owning Stocks

An Introduction, Benefits And Risks of Owning Stocks
The stock market is a very competitive and risk driven business. The term Stocks and Shares are vague to most people and as such they don’t have even the tiny glimpse on how these equities operate.

When people hear the term ‘Stock’, they are puzzled. So what is Stock? A Stock of a corporation is all of the shares into which ownership of the corporation is divided. In American English, the shares are collectively known as “stock”. A single share of the stock represents fractional ownership of the corporation in proportion to the total number of shares.

A stock (also known as “shares” or “equity”) is a type of security that signifies proportionate ownership in the issuing corporation. This entitles the stockholder to that proportion of the corporation’s assets and earnings. (Investopia Aug 16, 2019)

Stocks are bought and sold predominantly on stock exchanges, though there can be private sales as well, and are the foundation of nearly every portfolio. These transactions have to conform to government regulations which are meant to protect investors from fraudulent practices. Historically, they have outperformed most other investments over the long run. These investments can be purchased from most online stock brokers. Stock investment differs greatly from various investments.

How to Understand Stocks

Stocks emanate when Corporations (businesses) issue (sell) stock to raise funds to operate their businesses. The holder of stock (a shareholder) then buys a piece of the corporation and has a claim to a part of its assets and earnings.

In other words, a shareholder is now an owner of the company issuing the stock (s). Ownership is therefore determined by the number of shares a person owns relative to the number of outstanding shares. For example, if a company has 1,000 shares of stock outstanding and one person owns 100 shares, that person would own and have claim to 10% of the company’s assets and earnings (paid annually—first quarter, second quarter, etc).

It is important to know that ‘Stock holders’ do not own the corporations issuing them the stocks; they own the outstanding shares issued by the corporations. But corporations are a special type of organization because the law treats them as legal persons. In other words, corporations file taxes, can borrow, can own property, can be sued, etc. The idea that a corporation is a “person” means that the corporation owns its own assets. A corporate office full of chairs and tables belong to the corporation, and not to the shareholders.

Corporate property is legally separated from the property of shareholders, which limits the liability of both the corporation and the shareholder. If the corporation goes bankrupt, a judge may order all of its assets sold?, but your personal assets are not at risk. The court cannot even force you to sell your shares, although the value of your shares will have fallen drastically. Likewise, if a major shareholder goes bankrupt, she cannot sell the company’s assets to pay off the creditors.

Benefits of Owning Stocks

  1. Voting Right: Owning outstanding stocks gives you the right to vote in shareholder meetings, receive dividends (which are the company’s profits) if and when they are distributed, and it gives you the right to sell your shares to somebody else.
  2. Grow Money: One of the primary benefits of investing in the stock market is the chance to grow your money. Over time, the stock market tends to rise in value, though the prices of individual stocks rise and fall daily. Investments in stable companies that are able to grow tend to make profits for investors.
  3. Easy Purchase: The stock market makes it easy to buy shares of companies. You can purchase them through a broker, a financial planner, or online. Once you’ve set up an account, you can buy stocks in minutes. Some online brokers such as Bamboo, gives unrestricted access to over 3,000 stocks listed on the Nigerian stock exchange and U.S. stock exchanges, right from your mobile phone or computer (more on this, will be featured in the Part 2 of understanding the stock market article).
  4. Make money in two ways: Most investors intend to buy low and then sell high. They invest in fast-growing companies that appreciate value. That’s attractive to both day traders and buy-and-hold investors. The first group hopes to take advantage of short-term trends, while the latter expect to see the company’s earnings and stock price grow over time. They both believe their stock-picking skills allow them to outperform the market. Other investors prefer a regular stream of cash. They purchase stocks of companies that pay dividends. Those companies grow at a moderate rate.
  5. Sell off Easily: The stock market allows you to sell your stock at any time. Economists use the term “liquid” to mean you can turn your shares into cash quickly and with low transaction costs. That’s important if you suddenly need your money in a hurry. Since prices are volatile, you run the risk of being forced to take a loss.

The stock market is pretty large and if you’re not careful major terms could confuse you. However, it is a lucrative aspect of diversifying your wealth portfolio, if you are smart and have the patience associated with the stock market.

The Risks of Owning Stocks

The stock market is a very competitive and risk driven business. The term Stocks and Shares shouldn’t be new to most people and as such you should have even a tiny glimpse on how these equities operate in case of its crashing.

The Dark Times of Stocks

There used to be people who invested in local bank stocks years ago and till date they never saw any result of their investment. It’s no joke, it’s the reality. Trading and investing in stocks is amazing, I must really confess. It makes you feel powerful and at the top of the world (if the stocks are performing good). But when the unknown comes knocking on your door, you’ll be forced to open—oh, yes because it’s the unknown. Banks have been known to crash businesses the same (even giant publicly traded corporations), so why get your hopes up that nothing would happen to your precious stocks?

Don’t be deceived, anything can happen, besides—Change they say is constant. The financial crisis of 2007– 2008, also known as the global financial crisis and the 2008 financial crisis, was a severe worldwide economic crisis considered by many economists to have been the most serious financial crisis since the Great Depression of the 1930s, to which it is often compared. Why? It was a massive disaster to countries, businesses and large organizations. You really don’t want me to go back in time to relate my experiences those years, right? If you insist, tag me on Twitter and I’ll make a short thread.

What caused the 2007 financial crisis? It was the breakdown of trust that occurred between banks the year before the 2008 financial crisis. It was caused by the subprime mortgage crisis, which itself was caused by the unregulated use of derivatives. Despite these efforts, the financial crisis still led to the Great Recession. Tragic, Tragic indeed!

Just like the financial crisis ripped banks, stocks, bonds and etc., apart so does Stock Investment happen too, when fore-cast margins are not realized. So what are the cons (disadvantages) of trading and investing in those precious lovely stocks of yours? Pay rapt attention!

The Risks of Stock Trading and Investment

To start with honestly, the global stock market is volatile to changes at the global and local level. This follows that you should ideally be well-versed with the various pros and cons of investing in the trading market prior to proceeding with it. Also, considering the alarm-able fact that inflation has an eroding effect on individuals’ incomes, it is imperative that wise investment decisions are stacked up in order to counter such abrasion. However, on the positive side, whether you are a seasoned or maiden investor, the stock market is a good place to make your money grow.

  1. Profit Margin Brokerage: To be frank , every time an investor decides to buy or sell shares, they will have to shell out a certain proportion as brokerage fees to the broker. This, in turn, can jeopardize profitability. While investing in the stock market has its own advantages and disadvantages, it’s important to stay patient and invest for the long haul to maximize returns.
  2. Market Price Fluctuation: The market price of any equity share has a wide variation – let’s face the fact. It is always very difficult to book profits from the market. On the contrary, there are equal chances of painful losses.
  3. Risk at a High: Equity share investment is a risky investment as compared to any other investment like debts etc. The money is invested based on the faith an investor has in the company. There is no collateral security attached with it. So you can understand that if you fall, you fall out.
  4. Control is Limited: An equity investor is a small investor in the company, therefore, it is hardly possible to impact the decision of the company using the voting rights. Recall in the previous edition of this post?, It is important to know that ‘Stock holders’ do not own the corporations issuing them the stocks; they own the outstanding shares issued by the corporations. But corporations are a special type of organization because the law treats them as legal persons. In other words, corporations file taxes, can borrow, can own property, can be sued, etc. The idea that a corporation is a “person” means that the corporation owns its own assets. A corporate office full of chairs and tables belong to the corporation, and not to the shareholders.
  5. Investment of Time: Many folks I talk to about investing in the stock market feel that is like playing a lottery or bet. Listen?, Investing in the stock market is not like playing the lottery. You need to perform research and investment analysis to find potentially profitable stock. For many individuals, investing in the stock market is a time-consuming, complex task. Even after you find a stock to buy, you must monitor the movement of the stock’s price. Although many investors implement a long-term buy and hold strategy, it is important to know when to exit a stock position if it turns out to be a bad investment choice.

What Is The Future?

Oh, I understand that you’re scared, well you better be – but don’t be. After all they say ‘No guts, no glory’. For ‘potential’ stock market investors, they should always be aware that there is no guaranteed return on their investment.

Advantages of using your personal money to invest in the stock market include the potential return on investment and ownership stake in a company. Thus, it is essential to do a diligent study and in-depth research into one of the most critical aspects of business ventures – Stock Trading!

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5 thoughts on “An Introduction, Benefits And Risks of Owning Stocks

  1. I really did enjoy the read. I learnt alot.

    Questions
    1. Are there shareholders that will be willing to buy from a corporation that is bankrupt? If yes, what could be their reason?
    2. Are shares same as shareholders equity in a corporation?
    3.How is the dividend distributed, is it according to the number of shares held by each shareholder?

    Thanks so much @Uchechukwu

    Reply

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