Deposit Accounts: Understanding Stocks

by Amy Lillard

(3/11/2013) Savings accounts, CDs, money market accounts and other deposit accounts provide savers an opportunity to set money aside in a risk-free manner and earn steady interest.

But when saving towards a longer-term goal like retirement, many people look for an opportunity to try a riskier but potentially more lucrative method: stocks.

Business owners have several options when they wish to raise money for the company. They can borrow money through a loan. They can issue bonds. Or they can go public, creating a certain number of shares of ownership (stocks) for sale.

Buying a stock is buying a unit of ownership in a company. Owning stock gives you the right to help determine the future of the company through voting on members of the board and other key issues. And it gives you the right to share in profits made by the company. If a company is highly successful, you will gain money through increased value of your stock; if a company suffers, you will lose money through decreased stock value.

A stock is considered a security, along with bonds. Stocks are equity, while bonds are debt. Stock buyers are considered owners and bond buyers are considered creditors. In a worst-case scenario of an organization failing and claiming bankruptcy, bondholders have higher claims on assets than shareholders and will get paid first. This makes bonds less risky by comparison, but with potentially lower return.

There are two types of stock:

• Common stock. This is the type usually owned by individuals and represents the majority of stock held by the public and discussed in the news. Buying this type of stock provides voting rights and the rights to share profits (also known as dividends).

• Preferred stock. This type of stock usually carriers fewer ownership rights. However, companies issuing this type of stock usually pay dividends on preferred stock first, and pay fairly consistently.

Stocks are considered a highly liquid investment, meaning you are free to buy or sell shares at any point and as often as you wish. Other investment vehicles usually limit movement of funds.

Since stocks are liquid, many savvy investors buy and sell regularly in search for the best deal and highest return. Stocks are bought and sold through exchanges, including the New York Stock Exchange and the National Association of Securities Dealers Automated Quotation System (NASDAQ). To do it well, constant research is required. For those that want guidance and assistance, brokerages are a great resource.

For Additional Reading:

Understanding Stocks and Shares for Beginners:
http://budgeting.thenest.com/understanding-stocks-shares-beginners-10005.html

Stocks Basics:
http://www.investopedia.com/university/stocks/stocks1.asp#axzz2MhUfA6ly