It might have happened so many times when one of your friend or colleague discussed how he had managed to reap an enormous amount of
money by selling the stocks and that left you wondering what business
acumen he has that you don't have. Some of the risk averters and
conservative amongst us would think that why gamble with the hard
earned money.
A decade back ‘stocks’ and ‘dividends’ were no less than exotic terms
for common employed people like us. However, the ever increasing
Internet penetration and the advances in trading technology excites
many among us to strike gold overnight by investing in stocks. The
chats at the office cafeterias and tea stalls and taking volunteered suggestions have led to many disastrous investments, and ultimately
leading to a wrong notion about this Financial Instrument.
However, proper knowledge and understanding of the instrument is as
important as any skillful job requires. My intention with this post is to give some basic idea about Stocks for novice looking for some layman explanations.
Stocks: Going by definitions, buying stocks is getting a share of the
ownership of a company. Shares, equity or stocks are used for the same thing. Now question is “I am a shareholder, what is mine?” The answer is you have a claim on its "Assets" and "Earnings".
My Ownership: Now you have a share means you are amongst the many
other owners (shareholders) of the company.
That doesn’t mean you will start day dreaming of asking Vijay Mallya sending one of his calendar girls at your service if you have bought a Kingfisher share. The shareholders of a public company do not have a say in the day-to-day activities of a company. But that shouldn't
upset you because as a shareholder you are not supposed to work to make those bucks rather you are entitled to the profits and assets.
Profits are at times paid out as dividends, while the assets only comes into picture when the company goes for a bankruptcy where you as
a shareholder will receive what is left after all the creditors have been paid off.
The company has gone for bankruptcy filing, will the bank seize all my accounts? The answer is big ‘NO’. The beauty is, as an owner of a stock you are not liable if the company is not able to pay its debts.
Now answering the most obvious question “
Why does the company needs me to buy stocks, and share its hard earned profit with me?” The answer is simple, Where does the company go when it needs to raise money? It
can either borrow or raise it by selling a part of it which is known
as ‘’Issuing stocks”.
Now comes the bad news “
What are the risks?” The company is not obligated to pay dividends and without them the only way an investor can earn is through its appreciation in the open market. On the flip
side, any share may go bankrupt and in that case your investment is
gone.
I hope to have answered few of the very basic questions of the budding trader inside you.