What are stocks?

With a similar logic to bonds which are based on buying the debt of a company with the right to interest, shares allow you to buy part of a company. When you buy shares you become a shareholder and technically you become the owner of a fraction of the company, so when the company grows, so does the value of your shares.

In order to increase their capital without the disadvantage of going into debt, companies issue shares as a cheaper alternative to bonds. That way they don’t have to pay interest to shareholders, they just pay dividends, if they so decide or if they stipulate in the articles of incorporation. The capital generated is used to invest in the company or expand the business to other markets.

The shares are launched and traded on the stock market, which in turn is organized in the different countries or regions as stock exchanges. For example, the USA with the NYSE (New York Stock Exchange) and the NASDAQ, in the UK the London Stock Exchange, and in Portugal the PSI20 is an index grouping the 20 most valuable national companies

There are different types of shares

  • Preferred – Being preferred, they are the first to receive dividends, the first to receive in case of bankruptcy (priority over common), but have no voting rights.
  • Common – In comparison to the first where they lose priority but they gain the right to vote

Advantages

  • Security -Although riskier when compared to other instruments such as deposits or bonds, they offer the possibility of unlimited gains, as the company can be expected to have a growth trajectory over time that will reflect in the growth of its stock value;
  • Dividends – Regular payments to shareholders, typically made quarterly or annually. They are distributed when a company has a profit surplus and decides to reward its investors;
  • Liquidity – Ability to sell our share whenever we want and with some ease in finding buyers. Ideally sell above the initial purchase price;
  • Voting Rights – May confer voting rights in elections of Management, Executive Board, or changes in strategy. Voting power is proportional to the number of shares we own in the company;

Disadvantages

  • Profitability/Risk Ratio – Allows good gains, but also significant losses, in an extreme case we can lose the entire amount invested;
  • Priority – In the case of insolvency, the shareholder is below the bondholders in the legal priorities. In an insolvency declaration, the bondholders are paid first, and only afterward, if there is some money left, there is payment to the shareholders
  • Time/Analysis – The choice for the company to invest in should be a thorough process of research, analysis of balance sheets, and viability projections of the company, the sector, and the competition

For whom

The target audience is broad. It suits investors at an early stage of their career and willing to incur greater risk and be able to increase their return. Also for those looking for a direct way to invest for the long term, they can be the fastest instruments for wealth accumulation and easy and immediate conversion.

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