Stock

A stock is the ownership of a fraction of a company. When buying a share (or stock) of the company, the investor becomes a shareholder. In return for the financial exchange, the shareholder is granted ownership rights and voting rights (Parameswaran, 2012). The most common arrangement is 1 voting right per share. The voting right is often useful when electing the new director of the company (Parameswaran, 2012). However, it is important to know that a company often issues more than one type of share, also known as class shares, with include different voting rights.

Furthermore, when a company is profitable, it can choose to redistribute its gains through a dividend, which investors can pocket as cash or reinvest.

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A simple example is that company Y issues class A stocks (that have 5 voting rights per share) and class B shares (only 1 voting right per share) (Investopedia, 2020b). The return on investment on your initial stock investment is dependent on the company’s performance. For instance, if you purchase a stock at a price of $30 per share and a year later the company has been very successful, the price per share may rise to $50, therefore you could resell a certain amount of your shares and make a profit.   

Stocks can be classified in in different types as not all of them behave in the same way and may be affected by different factors, here are some examples of stock types: 

• Common and preferred stocks:

• Simply put, a common stock represents a share of a company with which comes a voting right (1 share = 1 voting right). If a company's board wants to elect a new chairman, the owner of a common stock would have the right to vote for the new chairman or director of the company.

• In contrast, preferred stocks generally do not carry any voting right, but associated with certain privileges, such as having priority on receiving higher dividends if the company has achieved its targeted financial goals (Investopedia, 2021b). Some investors purchase preferred stocks because they provide lower but consistent dividends over time. In contrast, a common stock is more volatile, therefore the dividend received is more inconsistent (Investopedia, 2021b). 

• Growth and cyclical stocks:

• The value of a cyclical stock increases and decreases in accordance with the business cycle. During a recession the price decreases, whereas during an economic boom the price increases.

• In contrast, the value of a growth stock influenced by the quality of the product from which the company is deriving its sales and the quality of its management, rather than wider economic factors & cycles (Parameswaran, 2012; FINRA, 2021d).

• Industry & Sector: The economy can be divided into large chunks, often referred to as sectors, classically divided into primary-secondary-tertiary-quaternary. For instance, the financial sector belongs to the tertiary sector. An industry is a more specific part of a sector, for instance real estate companies and banks represent specific industries that are part of the wider financial sector. During a major event, an entire industry may be affected. For example, scarcity in natural gas resources can increase the cost to extract natural gas, and therefore decrease a natural gas company's profit. On the other end, a sector could experience an era of expansion or innovation leading to more investment, an example of this is the green financial market (FINRA, 2021d). Being aware of the current trends and cycles that occur or could affect the industry and sector in which you want to invest will help you build a better and more resilient portfolio. Thus, before making any investment, learn about the sector in which you want to invest and examine different companies' performance. 

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