What are stocks?

Do you look at the financial pages of your favourite newspaper with pure fascination? Are you happy with the company that made your TV and would you like to own stocks from that company? It’s all possible, but before you buy some stocks it’s recommended that you know what stocks really are.

Where stocks come from

Exchange AmsterdamThe fun thing about stocks is the fact that they originated in the Netherlands. The VOC (Dutch East India Company) that was founded in 1602 was looking for new capital to fund its voyages. To raise the funds the company decided to sell stocks. These stocks did not give the stockholders any right to dividends, but they did have a right to a portion of the plunder.

What is a stock?

A stock is a proof of ownership in a company. Starting a company usually takes a lot of money and by issuing stocks companies can raise money. Issuing stocks is also called stock emission. The capital that is raised by issuing stocks is permanent, meaning that the company doesn’t get stuck with a debt – as it would in the case of a loan.

When you buy stocks, you become a stockholder or shareholder. Shareholders are the owners of the company and have a say at the shareholder’s meeting.

Return on stocks

Most people buy stocks to eventually make money with them. But how can you make money from buying stocks? There are two ways you can make money from stocks. The first way is pretty straightforward. As stocks are tradable, there is a supply and demand for stocks. The value of a stock is the price that you can buy and sell the stock for. When you hold the stocks awhile and its price goes up, you make money.

But this isn’t the only way you can make money from stocks. A lot of companies pay dividends. Dividends are the distribution of profits; the company can determine how much of the profit is issued as dividends. Some companies never pay dividends, but there are companies that pay quite a lot – so pick your stocks based on your preferences.

The risks in trading stocks

Naturally, trading stocks comes with some risk. Now that you know what stocks are, you are one step closer and your chances of making money have increased. One risk of stocks is the so-called ‘price risk’: there is a chance that the stocks you buy loses value. If you sell the stock for a lower price, you lose money. Besides this risk, there is also a chance that the company goes out of business and when a company goes bankrupt you usually only get a fraction of the value of your stocks back.

Buying stocks

You can make money by buying and selling stocks. Personally, I like the option of trading CFDs the best. You can simply buy any known or popular stock against low fees and you have the option to use leverage. Since the fees are low, you can make more money than with traditional trading providers. Opening a demo with a broker is completely free.

When you want to hold stocks and aren’t planning on trading in the short or mid-term, then the old-fashioned account with an investment bank is probably the best way to go. You do pay more fees, but you can hold your stocks without any further cost.

Useful links: start trading directly!

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