Episode #35: What is a Stock Anyways?

what is a stock

August 4th, 2020

What is a stock? What are the main types of stock? How can you buy stock? If you’re new to the world of investing—or simply want a refresher on industry terminology—listen to this episode of Making Finance Fun. Beginners and savvy investors alike can all benefit from getting back to the basics!

Outline of This Episode

  • [2:24] What is a stock?
  • [4:59] What are the two types of stock?
  • [10:50] How can you own stock?

What is a stock? 

According to Investopedia, “A stock is a security that represents the ownership of a fraction of a corporation.” NerdWallet defines stock as “A type of investment that represents an ownership share in a company.” I prefer the latter definition. Basically, a stock is a fractional ownership share of an organization. 

If you want to own a small piece of Caterpillar, it will cost you around $140. A share of RLI will cost you $90. Simply put: when you buy a stock, you’re buying a fractional ownership share of whatever company you decide to buy into.

Everyone thinks of publicly traded companies when they think of stock, but a stock can be a piece of a public OR private company. Theoretically, a small business can sell shares of their business (though most don’t). 

The Two Types of Stock

There are two types of stock: There is common stock and there is preferred stock. There are pros and cons to each. What are the main differences?

According to The Balance, preferred stock owners “Do not have voting rights, but they do receive set dividends…” The main reason that people buy preferred stock is for the dividend. You may—it’s never guaranteed—get a higher dividend than if you had purchased common stock of the same company. It’s also more thinly traded, meaning you don’t typically see day-to-day stock swings. 

On the flip side, according to Investopedia, “Common stock usually entitles the owner to vote at shareholders’ meetings and to receive any dividends paid out by the corporation. Preferred stockholders generally do not have voting rights, though they have a higher claim on assets and earnings than the common stockholders.”

The biggest difference between common stock and preferred stock? Those who own shares of preferred stock receive dividends before common shareholders. If the company goes bankrupt and is liquidated, preferred stockholders get paid back first. The common stockholder may or may not get anything at all

Generally speaking, if a company wants to change its name, change its CEO, or change its board members they need to get stockholder approval. You as a common shareholder get to vote on it—preferred stockholders don’t get a say.

What about taxes? What do they look like for each type? Listen to find out!

The various ways to own stock

What are your options for buying a stock? Here are the most common ways:

  1. The first way you can own stock is to buy individual stocks or equities. You can just go on a platform and buy the stock directly in the marketplace. 
  2. The second way is more indirect—through mutual funds. They’re just a collection of investments and most own stocks. Rather than own one stock, you own a small portion of a collection of different stocks. 
  3. You can also own stocks by purchasing ETFs. 
  4. You can own stock inside your 401k or IRA. Most 401ks’ typically only allow you to own mutual funds or ETFs versus individual stocks.

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