This article and the ones that follow should give you a solid foundation in the knowledge of stocks and their use as financial instruments.
We have established the basic structure of a common stock share: a company issues stock to raise capital, the owner of the stock is entitled to participate in the profits of the company, and stocks are traded in the Secondary Market between buyers and sellers who assume the risk and receive any proceeds that arise from price changes.
The concept of risk—where taking greater risk entitles the bearer of the risk to greater potential returns (and losses)—is a fundamental tenet of investing. The shares and other instruments are “securitized” – that is, brought into being as financial instruments, and when investors buy them they gain equity but also assume risk.
If the company grows and succeeds and investors bid up its price, shareholders win. But the opposite can also be true.
This is where fundamental and technical analysis of stocks and companies is critical – it can help investors decide which risks are worth taking.
What is the difference between Common Stock and Preferred Stock?
What is the Difference Between a Growth and Value Stock?