Stocks represent ownership shares in a company.
When you buy a company’s stock, you’re purchasing a piece of that company, including a share of its assets and earnings.
The purpose of issuing stocks is to raise funds to finance business activities.
Companies can issue two types of stocks:
- Common stock
- Preferred stock.
Common Stock
Shareholders of common stock typically have the right to vote on corporate matters such as electing board members and corporate policy.
Common stockholders are last in line to receive any remaining company assets after a company pays its debts during liquidation.
Preferred Stock
Preferred stockholders generally do not have voting rights, but they have a higher claim on earnings and assets.
This means that preferred shareholders will receive dividends before common shareholders and are also first in line to receive any remaining assets after debtors if the company is liquidated.
Lit Pools and Dark Pools
Stocks are bought and sold on “lit pools” and “dark pools”.
A public stock exchange where the order book is publicly shown and available to all participants is called a “lit pool.”
This means that traders using a lit pool can use the order book to see how much liquidity is on the bid and offer for a security. This can be used to figure out where a stock is going in the short term.Dark pools are private markets that only institutional buyers can use. “Dark pools” is the name for these secret exchanges, which are also called “Alternative Trading Systems” because they are not open to the public.
The main difference is that dark pools don’t have public order books or show the prices a buyer or seller is ready to pay, while lit pools do.
Supply and Demand
The price of a stock is determined by supply and demand in the market.
Factors such as the company’s earnings, the economy’s health, market sentiment, and geopolitical events can influence a stock’s price.
How to Profit from Stocks
Stock trading is a way for investors to grow wealth over time.
Traders can profit from stock ownership in two ways:
- Dividends
- Capital gains.
Dividends are a portion of a company’s earnings distributed to shareholders. Capital gains are profits that investors earn when they sell a stock for more than they paid for it.
Investing in stocks also comes with risks. The company’s stock you own could decrease in value or, in the worst case, become worthless if the company goes bankrupt.