Stocks represent ownership of an asset. This can be financial assets such as index funds or physical assets such as Houses.Stocks are mostly used to refer to ownership in a company. stocks are also known as shares or equity.
Types of Stocks
Common stocks give stockholders a claim on the company's future earnings and voting rights but these stockholders are usually the last in line in the eventuality the company goes into administration or is wound up. This means they will be paid last after all of the companies creditors are paid.
Preferred stockholders do not have any voting rights in the company but receive a dividend payment and will be in line before common stockholders for a share of the proceeds from the companies assets if it goes into administration or is wound up.
Raising money with company stocks
Company founders can raise money by selling some of the stock in their business. Investors can also buy stock from public companies such as Coca Cola, Apple etc.
Buying a company's stock will give you proportional ownership of the company.
When you own a company's stock you have a proportional claim of the company’s assets and future earnings & dividends.
The price of stocks will rise in line with the total value of the company.
If a company has 100 stocks and a value of £100,000 and you buy 10 stocks for £10,000, you now own 10% of the company.
If the value of the company rises to £1,000,000 in a few years and you still own those 10 stocks which still represent 10% of the company then your total stock value would now be £100,000. This is the main reason a lot of investors buy stocks, they hope for a future increase in the value of the companies they invest in.
Post money and pre money valuations
When companies raise money you will typically hear the terms Post money and pre money valuations.
Pre Money valuation means the valuation before you raise money.
Pre Money valuation is the valuation agreed between the company founder and investors prior to any investment. This is the valuation at which the investors buy stocks of the company.
Post money valuation means the valuation means the value after you raise money.
Post money valuation is simply the pre money valuation plus the amount raised.
Example: Your pre money valuation is £1m and you want to raise £1m, this means your post money valuation is £2m. An investor who invested £1m will now own 50% of your company.
The Stock Market💹
The stock market is a place where public company stocks can be bought or sold. Stock brokers help investors buy and sell stocks by executing buy or sell orders.
Should you invest in stocks?
Investing in stocks is a good way to build your wealth but you should also be aware of the risks involved in company stocks and what affects their price movements.
Stocks allow you to:✔
Receive dividends proportional to the amount of stocks you own. Not all companies issue dividends and not all stocks are eligible for dividends so you should inquire about this before purchasing a stock.
Some dividends have voting rights. This means stockholders can vote on company affairs at the annual general meeting.
What are Stock splits?🌗
stock splits can be initiated by companies in a bid to reduce the cost per stock. This will then make it affordable to more investors who couldn't afford the minimum 1 stock purchase. Stock splits mean the company will split each individual stock to smaller stocks.Example one stock can be split into two stocks or 5 and their prices will be adjusted accordingly.
Stocks can be volatile and their price movement can be affected by a number of things happening in the economy or market at any given point. The rule of thumb for stocks is to keep 100- your age = the percentage of your portfolio you should keep in stocks. As you get older financial advisors will begin to recommend you put more of your portfolio in safer investments such as bonds.
You can access private company stocks through crowdfunding sites and public company stocks through mutual funds or by buying directly from the stock market. A robo advisor or wealth management app will also allow you to pick your risk threshold and then execute investments on your behalf in a variety of assets including company stocks.
This helps you diversify your risk and ensure your investment goals have a realistic chance of coming to fruition.
You can own stocks by buying them directly, buying mutual or index funds and by buying exchange traded funds.
mutual funds are a basket of different shares or portfolio of shares.