Equity
From Bank - Financial Institutions around the world
A stock is a share in the ownership of a company. Owning stock in a company makes you a partial owner of the company, and thus you have a claim on the company's assets and voting rights in company matters. Stocks are also referred to as equity because they represent a share of ownership. Unlike bonds, stocks do not guarantee a certain return on your investment, and you can even lose some or all of your principal. However, this greater risk means stocks must perform better to compensate for the higher risk. Return on investment for stocks comes in two forms: capital gains, and dividends. Capital gains growth comes when the stock you buy increases in price above the purchase price, so the value of your investment has increased. However, this value cannot be realized until you sell the stock, at which point you must pay taxes on the gains. The other form of return on stocks are dividends, where the company you own stock makes cash payouts to stockholders from the company's profits. Dividends paid out in a fixed amount per share of stock, so the dividends you receive are proportional to the number of shares you own.
Stock Investment Basics
Historically, over the long run, stocks have performed better than bonds and have returned an average of about 10% annual returns. While those returns are not guaranteed, investing in a wide range of stocks over a long period of time should give similar results since the market can be expected to continue to perform as it has in the past. It is important to remember that though the market as a whole can be expected to continue to perform well over the long run, wide fluctuations in individual stocks or even the entire market over a short period are possible. A company's stock price reflects what investors think about the stock, not necessarily what the company is "worth." For example, companies that are growing quickly often trade at a higher price than the company might currently be "worth." Stock prices are also affected by all forms of company and market news. Publicly traded companies are required to report quarterly on their financial status and earnings. Market forces and general investor opinions can also affect share price. In particular, there are two classic market types used to characterize the general direction of the market. Bull markets are when the market is generally rising, typically the result of a strong economy. A bull market is typified by generally rising stock prices, high economic growth, and strong investor confidence in the economy. Bear markets are the opposite. A bear market is typified by falling stock prices, bad economic news, and low investor confidence in the economy.
