What are stocks? Well, that’s a great question. The fact is, not all stocks are created equally. If someone wants to be successful in the stock market, they should understand how it works.
This article will tell you what stocks are and would give you some pointers on how to be successful in the stock market.
What Is a Stock?
A stock (also known as equity) is a security that represents the ownership of a fraction of a corporation. This entitles the owner of the stock to a proportion of the corporation’s assets and profits equal to how much stock they own. Units of stock are called “shares.”
Stocks are bought and sold predominantly on stock exchanges, though there can be private sales as well, and are the foundation of many individual investors’ portfolios. 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.1 These investments can be purchased from most online stock brokers.https://9e80a5c979330454de89a0ff50fcf148.safeframe.googlesyndication.com/safeframe/1-0-38/html/container.html
KEY TAKEAWAYS
- A stock is a form of security that indicates the holder has proportionate ownership in the issuing corporation.
- Corporations issue (sell) stock to raise funds to operate their businesses. There are two main types of stock: common and preferred.
- Stocks are bought and sold predominantly on stock exchanges, though there can be private sales as well, and they are the foundation of nearly every portfolio.
- Historically, they have outperformed most other investments over the long run.1
Understanding Stocks
Corporations issue (sell) stock to raise funds to operate their businesses. The holder of stock (a shareholder) has now bought a piece of the corporation and, depending on the type of shares held, may have a claim to a part of its assets and earnings. In other words, a shareholder is now an owner of the issuing company. Ownership is 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.2https://9e80a5c979330454de89a0ff50fcf148.safeframe.googlesyndication.com/safeframe/1-0-38/html/container.html
Stock holders do not own corporations; they own shares issued by 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 belongs to the corporation, and not to the shareholders.3https://9e80a5c979330454de89a0ff50fcf148.safeframe.googlesyndication.com/safeframe/1-0-38/html/container.html
This distinction is important because 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 her creditors.4
Stockholders and Equity Ownership
What shareholders actually own are shares issued by the corporation; and the corporation owns the assets held by a firm. So if you own 33% of the shares of a company, it is incorrect to assert that you own one-third of that company; it is instead correct to state that you own 100% of one-third of the company’s shares. Shareholders cannot do as they please with a corporation or its assets. A shareholder can’t walk out with a chair because the corporation owns that chair, not the shareholder. This is known as the “separation of ownership and control.”https://9e80a5c979330454de89a0ff50fcf148.safeframe.googlesyndication.com/safeframe/1-0-38/html/container.html
Owning stock 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.
If you own a majority of shares, your voting power increases so that you can indirectly control the direction of a company by appointing its board of directors.5 This becomes most apparent when one company buys another: the acquiring company doesn’t go around buying up the building, the chairs, the employees; it buys up all the shares. The board of directors is responsible for increasing the value of the corporation, and often does so by hiring professional managers, or officers, such as the Chief Executive Officer, or CEO.
For most ordinary shareholders, not being able to manage the company isn’t such a big deal. The importance of being a shareholder is that you are entitled to a portion of the company’s profits, which, as we will see, is the foundation of a stock’s value. The more shares you own, the larger the portion of the profits you get. Many stocks, however, do not pay out dividends, and instead reinvest profits back into growing the company. These retained earnings, however, are still reflected in the value of a stock.
Common vs. Preferred Stock
There are two main types of stock: common and preferred. 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. For example, owners of preferred stock (such as Larry Page) receive dividends before common shareholders and have priority in the event that a company goes bankrupt and is liquidated.2
The first common stock ever issued was by the Dutch East India Company in 1602.6
Companies can issue new shares whenever there is a need to raise additional cash. This process dilutes the ownership and rights of existing shareholders (provided they do not buy any of the new offerings). Corporations can also engage in stock buy-backs which would benefit existing shareholders as it would cause their shares to appreciate in value.
STOCKS EXAMPLES
NVIDIA (NASDAQ: NVDA)
NVIDIA isn’t necessarily a household name — that is, unless you’re a tech junky. However, if you use technology at all, there’s a strong chance you are an end user of the company’s products.
The company is the inventor of the Graphics Processing Unit, or GPU, a computer chip that was designed to expand the capabilities of computers and game consoles to provide improved graphics for the end user.
However, the GPU has gone far beyond what NVIDIA probably ever expected it would.
Today, the company’s high-tech computer chips are used in various servers and data centers. Given the company’s dominance in the data-center space, chances are its chips are being used in the server that’s feeding you the content you’re reading right now.
As technological innovation continues, GPUs are becoming increasingly important. Over the years, the company has proven that through continued innovation, its chips are likely to stay on top of the competition.
Moving forward, these chips are going to become more ingrained in day-to-day life, playing important roles in the development of artificial intelligence, autonomous driving, and other technologies of the future.
Now might just be the perfect time to get involved.
NVIDIA completed a four-for-one stock split on July 20, when shareholders received four shares at a quarter of the current price in exchange for each single share they own. The move is far more than cosmetic.
With the stock trading over $800 per share, access to the stock has been limited for those with less money to invest. The split effectively cut the price of each single share by 75%, bringing it down to around $200 and making it a more accessible price for investors with smaller portfolios.
This move worked wonders, leading a rush in demand for the stock and resulting in a spike in value.
In any case, NVDA is a stock well worth watching. Not only is the company a pioneer in the high-end computer graphics and processing space, it continues to innovate, consistently staying one step ahead of the competition and making the stock one worth watching closely.
United Airlines (NASDAQ: UAL)
United Airlines is a pure COVID-19 travel recovery play. With control over 12% of the United States domestic air travel market, it’s a name you likely know well or at least have heard of.
The airline industry has been suffering for some time. Who wants to be breathing recycled air thousands of feet in the air in a metal tube with hundreds of people they don’t know during the COVID-19 crisis? Nobody, that’s who.
Like all other publicly traded airline companies, United Airlines lost billions of dollars in 2020. These dramatic losses have led to a seriously low share price, which will prove to be a massive undervaluation as the travel sector continues to recover.
That could happen sooner than you think.
Vaccines have been administered to consumers for some time, with more than 179 million Americans fully vaccinated according to Google. The availability of these vaccines increases by the day. The COVID-19 new case trend slowed significantly early this year, with growth in case counts falling to levels that haven’t been recorded since before March 2020. While there has been somewhat of a resurgence in cases, many believe that thanks to the widespread availability of vaccines, the second wave of the virus will be short-lived.
That’s great news for airlines and any other stock in the travel industry.
As COVID-19 cases continue to wane, people aren’t just going to be more likely to travel, they’re going to be itching for it. If you’re like most people, you’ve been stuck in your house for a year. Maybe you decided to abort the annual vacation plans, you haven’t seen your family much, and you’re going stir crazy. So, what do you need?
A vacation!
As soon as the pandemic is largely under control, consumers are going to start traveling again, and I’m expecting to see a big boom in the sector. Moreover, considering the economic impact of COVID-19, consumers are probably going to be looking for the best deals they can get on travel, which bodes well for United because it’s a discount airline.
At the same time, while Delta Airlines and Southwest Airlines have already begun their recovery in a big way, United Airlines has only seen minimal growth since mid-pandemic lows. Its stock has seen the slowest recovery in the industry since the start of the COVID-19 pandemic, leading to an extreme undervaluation that would be hard for most value investors to ignore.
Not to mention, Southwest Airlines has been forced to cancel several flights as a result of a workforce shortage, which gives its competition — namely United Airlines — an opportunity to jump in and pick up the slack.
There’s no guarantee that COVID-19 will be under control any time soon, nor a guarantee that the travel industry will recover in the near term. However, all signs point to these being the most probable outcomes, making United Airlines a stock that shouldn’t be overlooked.
Bio-Rad Laboratories (NYSE: BIO)
Given current times, the medical sector garners quite a bit of conversation. While the majority of focus is being placed on companies working to develop vaccines and therapeutics for the coronavirus, a huge opportunity is emerging surrounding the technology that makes the development of these products possible.
Bio-Rad Laboratories doesn’t develop vaccines or therapeutics. Instead, it focuses on providing other companies in the biotechnology space with the technology, documentation, and equipment needed to develop new therapeutics and vaccines.
This puts the company in the perfect position.
For some time now, the U.S. has been going through an evolution in medicine. New technologies have given experts an understanding of how the human body ticks like never before, paving the way for the development of cures for some of the world’s most devastating conditions.
Just 30 years ago, hepatitis C was a death sentence. Today, it can be cured. The same goes for a wide array of ailments for which advancements in medicine have led to cures or better treatments.
For all of this to happen, clinical trials must take place and equipment and data must be acquired. As such, companies like Bio-Rad Laboratories realize high levels of demand.
As of the second quarter of 2021, revenue came in at $715.93 million representing year-over-year growth of more than 30%. As the medical community works to solve more significant problems, the company’s leading products and services will continue to experience high levels of demand.
At the moment, only one analyst covers the stock, but that coverage carries a Buy rating and a price target of $930 per share, representing the potential for more than 15% growth in the stock over the next year.
All told, Bio-Rad Laboratories offers up a long list of in-demand products in the biotechnology space. With expectations for a continuation of the recent innovation in the medical space, there’s no reason to expect any slowing in the company’s growth, making it a stock that’s hard to ignore.
Avoid Playing the Short Squeezes
One of the hottest topics on Wall Street so far in 2021 has been the Big Short Squeeze, an event that saw retail investors take aim at hedge funds that profit from taking large short positions in stocks.
By banding together and purchasing a massive number of shares in these stocks, retail investors on the WallStreetBets subreddit forced massive short squeezes, causing incredible losses for hedge funds and leading to just as significant profitability for many of the retail investors involved.
As a result, GameStop, Blackberry, AMC, and even Canadian cannabis company Sundial Growers saw dramatic gains. Millions of newcomers started to follow the WallStreetBets subreddit in hopes of tapping into these incredible gains.
Unfortunately, the short squeeze is a complex trade to play, and a large number of the newcomers to the stock market bought in at the wrong time, losing a massive amount of money on the downswing.
This has even led to a rush into Bitcoin after WallStreetBets posted about the electric vehicle maker Tesla accepting Bitcoin as a form of payment, becoming the first vehicle manufacturer to do so.
Following the herd may seem like an exciting concept, especially when it seems as though the herd is winning. But the reality is that by following the herd on these highly volatile moves, you’re opening the door to potentially significant losses, especially if you’re not an experienced stock trader.
Wise investment decisions, built on research and made for the long run, are the decisions that ultimately result in wealth for those who make them.
Conclusion
When you buy stock, you can think of yourself as buying a piece of the company. If the company makes more profit, the value of its shares rises, and if it doesn’t do as well, the shares fall in value. So a share of stock is a way to have a stake in the future profits of a growing company.