Stock is the legal capital of a corporation divided into shares. When you invest in stock you own a part of the business, helping it to grow and expand. Stockholders have voting rights in the companies in which they own and come together annually with other shareholders to elect a board of directors to manage the company. Most individual stockholders own a very small percentage of a company’s assets. However, some very large stockholders can exert a great degree of control over a company’s policies and management.
Investors in common stock can earn money from their investment in two ways: through dividends and through capital gains. When a company makes a profit, it may divide part of the profit among the shareholders in the form of dividends. If the company is growing, it may use the profits to fund expansion instead of distributing more of the profit to shareholders. Or it may decide to issue dividends in the form of additional shares of stock instead of cash payments. When paid, dividends are generally distributed to shareholders four times a year.
Some firms regularly distribute high dividends to their shareholders. These companies tend to be more established, and their growth has stabilized at a certain level. They also have fairly predictable expenses and income. Other firms may pay smaller dividends or no dividend at all, but they offer the potential for future growth. Young firms in promising industries might fall into this category. Whether you choose to invest for income or potential growth will depend on your individual investment goals.
All stock investors hope their company will grow and become more profitable, increasing the value of their stock. If earnings continue to increase, so should dividends. This enables them to sell their shares for a profit and realize capital gains from their investment. Stockholders can sell their shares at any time at the current market value. The price can fluctuate daily depending on such factors as general economic conditions and the earnings and future prospects of the company.
Most stock is known as common stock. Preferred stock is a special form of stock, not issued by all corporations. Preferred stockholders receive preference over the common stockholders. In the event of a bankruptcy, preferred stockholders receive any assets prior to the common stockholders.
To learn more, please contact your BB&T Scott & Stringfellow Financial Advisor today.