Key takeaways

• A stock is a type of security that represents a portion of ownership in a corporation.

• There are two main types of stocks: common stock and preferred stock.

• You can profit from buying stocks in two ways: investing for capital appreciation and getting dividend payments.

Understanding a stock

A stock is a type of security that represents a portion of ownership in a corporation. Holding a company’s stocks makes you a stockholder. Owning shares issued by the company gives you the right to share in both the good times and the not-so-good times of the company.

There are two main types of stocks: common stock and preferred stock. A common stock gives shareholders voting rights but no guarantee of dividend payments. And a preferred stock provides no voting rights but usually guarantees a dividend payment.

Broadly speaking, investors can profit from stock buying in  two ways:

First, purchasing shares when they are at a low price and selling them when the price goes up. Most often, stocks are bought and sold on stock exchanges, such as the Nasdaq and the New York Stock Exchange. The stock price can and will rise and fall, based on a variety of factors in the global landscape and within the company itself. You can profit from buying stocks by selling your stock if the stock price increases from their purchase price. 

Example

Google's opening price was $968.95 on June 1, 2016. Its closing price was $2,411.56 on May 31, 2021. If you have bought Google stocks 5 years ago, you will have a 148.89% return on your investment. It sounds great, right?

The other way that you can profit from buying stocks is by receiving dividends. Some stocks pay regular dividends. The more shares you own, the larger amount of dividends you get. However, not all stocks pay dividends. It depends on a company's cash reserve and management.

Example

"$Apple(AAPL.US)$'s board of directors has declared a cash dividend of $0.22 per share of the Company’s common stock. The dividend is payable on August 12, 2021 to shareholders of record as of the close of business on August 9, 2021."

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