Investing in a Company Through Stock Ownership
Provided that a company is publicly rather than privately held, it is possible for outside investors to buy stocks in it through the offices of a stockbroker. Generally speaking stocks available for public sale in this way are known as common stock.
Investing in stocks brings the purchaser a direct share in the ownership of the company in question. Any profits generated by the company result automatically in a corresponding growth in the investment amount. However there is a down side as it is common for companies to fail, and in the event of liquidation the first legal obligation of any business is to pay out creditors and holders of preferred, rather than common stock. Owners of the latter can expect to receive only what is left thereafter, if indeed that is anything.
Characteristics of Investors in Common Stock
A shareholder in common stock has voting rights and is therefore able to exert some influence on that company’s financial policies and strategies. He or she will also be entitled to dividends, a benefit issued by the board of directors after consideration has been made as to what proportion of the company’s profits are to be reinvested into the business.
Those directors are elected by shareholders, providing them with every incentive to keep them happy through good company performance and the turning of a healthy and consistent profit.
Minimizing Risk Through Diversification
The risks associated with investing in stocks are typically higher than those involving bonds or the money market, but returns on successful investments are generally higher, especially when held for longer periods. Most serious shareholders minimize their risk by diversifying, that is investing in a varied portfolio rather than staking everything on the fortunes of one particular enterprise.
Diversification will often also involve spreading capital over several investment streams, as well as simply purchasing a range of stocks.