A stock represents ownership in a company. Therefore, when you purchase stock, you be-come part owner of the company. The number of shares of a company’s stock that you own generally indicates what portion of the company you own. For example, Walt Disney has sold 2,042,000,000 shares to the public. So if you owned 10 shares of the company’s stock, the percentage of the company you would own is .0000005% (10/2,042,000,000 = .0000005%). The first time companies sell stock to the public in order to get enough money to build their businesses, they usually do it through a process called an Initial Public Offering or IPO.
What a Stock Is Not
Now, let's consider what a stock is not. Investing in a company (purchasing stock) is very different from lending money to a company (i.e. purchasing a corporate bond). When you buy the stock of a company, there is no guarantee that you will get your money back or that your stock will go up in value. By contrast, when you purchase a corporate bond (i.e. make a loan to a company), you will be repaid unless the company goes bankrupt.
Even if the company does go bankrupt, the company’s lenders will get paid back first (with the proceeds of the sale of the company’s assets) before the stockholders get a penny. Because those who own stock in a company take on more risk than those who lend money to the company, it’s important that Teenvestors understand the basics of the stock market.
Two Types of Stock: Common and Preferred Stock
There are two basic types of stocks: common stock and preferred stock. Owning common stock entitles a Teenvestor to a share of a company’s profit if the company decides to distribute those earnings by paying dividends. Common stock holders can also vote to determine a company’s leadership and they can get a piece of the company’s remaining value if it ever has to be sold due to bankruptcy. As a Teenvestor, you'll probably only purchase common stock.
Preferred stock generally pays a fixed rate of dividends. More importantly, the preferred stock dividends must be paid before common stockholders get their dividends. Because preferred stockholders get fixed dividends, they are not entitled to a larger share of the profits if the company does extremely well. On the other hand, they are taking on less risk because if the company does poorly, they still get paid dividends before the common stockholders.