What Are Stocks, Stock Market and Stock Exchange?

What are stocks, and what does it mean to own a stock of a company? What are the stock market and stock exchange? When I first started investing in stocks, the concept of owning a stock was somewhat obscure to me. Initially, I viewed it merely as a potential source of income. However, as my knowledge grew, I came to understand that it is more than that. In this post, we’ll delve into this topic further.

The History of Stocks
What Are The Stock Market, Stock Exchange, and Stock Brokerage
What Are Stocks
Different Types of Stocks
Bonds

Understanding the distinction between the stock market and the stock exchange, or delving into their history might not impact your success or investing strategy. However, it is good to know how everything works.

History of Stocks

There are no written records of when or how stocks were invented. However, it is believed to have evolved from a simple partnership between merchants and investors. Various financial instruments resembling stocks already existed in medieval Europe when merchants and investors would form partnerships, and share both the profits and risks of trade ventures. This laid the foundation for the idea of ownership of a business.

First Public Trade Company

Dutch East India Company, which was considered one of the earliest public trade companies, issued shares to the public in 1602. Investors at that time could buy or sell the issued shares on an organized stock exchange in Amsterdam.

Development In Other Countries

The idea of being a partial owner of a company then started to develop in many other countries. London Stock Exchange was established in 1698, the Philadelphia Stock Exchange in 1790, New York Stock Exchange (NYSE) in 1792. Tokyo Stock Exchange, Hong Kong Stock Exchange, Shanghai Stock Exchange in the 19th century, and Sydney Stock Exchange, the first exchange in Australia in 1871. Sydney Stock Exchange later merged with other state-based exchanges in 1987 and formed the Australia Stock Exchange (ASX).

Stock Market, Stock Exchange, and Stock Brokerage

The stock market and stock exchange are crucial components of the financial world, but they are not the same. The stock market is a broader concept, an ecosystem where investors buy and sell financial instruments, primarily stocks and shares. We discuss the stock market, we are encompassing the entire framework of trading activities and investment opportunities available to participants.
On the other hand, stock exchanges are specific, regulated marketplaces within the broader stock market where buyers and sellers come together to execute transactions. Companies’ stocks are listed on these exchanges and the stocks can be traded publicly. While some exchanges, like the NYSE, have physical locations, which is located on Wall Street in Manhattan, many operate virtually.
Lastly, stock brokerages are vital intermediaries in the stock market ecosystem, executing transactions on behalf of investors. They are often referred to as stockbrokers (A broker can also be a financial professional who executes orders on the stock market). Companies like Fidelity, J.P. Morgan, Robinhood, CMC Markets, Etoro, and Moomoo are all examples of brokerage/online brokers.

What Is a Stock

A stock symbolizes ownership in a company. When you buy stocks of a company, you essentially become a partial owner of that company.
It’s crucial to grasp this concept before delving into stock investing. Buying a stock does not make you a mere spectator passively watching price fluctuations for profit. This passive approach resembles gambling rather than investing, You have to shift away from this passive mindset is necessary to be successful in stock investing.
I did not understand that at first. Although I was told numerous times on YouTube, blogs, and books, somehow it just didn’t register in my mind. A stock to me was just a medium to get rich. I bought whatever was recommended on the brokerage app or what my friends told me and just hoped it would go up. I was gambling.

Imagine this. If a company reaches out to you and asks for a $5000 investment in the company. What you would do before and after you invest? If you are seriously considering investing in the company you would probably start asking some questions and look for answers to validate your decision. Is it a viable business? Is there a demand in the market? Is it a good product? Does it solve a problem? What are the obstacles? Does the company have a good reputation? Is it financially well or is it on the brink of bankruptcy? You are likely to do everything you can to make sure that it is a rewardable investment and that your hard-earned money won’t go down the drain.

But why is it different when it comes to stock investing? Speaking of my own experience, I was a very thrifty person, I was careful with money and would not spend a cent on anything unless I could get rewarded with more than I invest. But somehow, I did what contradicted my personality and like most “investors”, just threw my money into the stock market like I was buying a lottery ticket.

You Are Responsible

You have to understand that you are responsible for your success, and your success is determined by your actions, which are reflections of your mindset. Of course, undeniably luck is 100% a crucial component of success, but there is nothing you can do about it. The only way you can alter your chance of success is through your actions.

Yes, we have to agree that we, most time of the time, have a marginal influence in company situations and big decisions due to our small stake in the companies we invest in. However, we are still one of the owners. Understanding, and truly grasping this concept is extremely crucial if you want to be an active investor. Allow this mindset to set in, and the actions will follow.

Common Stocks Vs Preferred Stocks, and Bonds

Common Stocks

There are different types of stocks that you can purchase, common stocks and preferred stocks. Common stocks, also known as equities, represent ownership in a company and often come with voting rights at the shareholder’s meetings. (Probably the only time we can directly influence a company we invest in). Common stockholders enjoy the potential for capital growth as the company grows, but the volatility of common stocks also means that investors are exposed to market fluctuations.

Preferred Stock

Preferred stocks are the combination of stocks and bonds, which are commonly referred to as hybrid security. It has the characteristics of both stocks and bonds. Preferred stockholders are entitled to fixed dividend payments, but the downside is it does not benefit as much from the company’s growth in terms of capital appreciation. Furthermore, preferred stockholders have no voting rights, and do not influence companies’ decisions.

What are the differences and which one should you invest in?

The choice of investment depends on your risk tolerance. Are you inclined towards a more conservative approach or are you willing to take on higher risks for the potential greater rewards? Preferred stocks enjoy enhanced security with a predictable fixed dividend payout, in contrast to common stockholders whose dividends, if any, can vary. Additionally, in the unfortunate event of liquidation — when a company is compelled to sell all assets and distribute proceeds to creditors and shareholders, preferred stockholders hold a higher priority compared to common stockholders.
Personally, I lean towards investing in stocks, which offer significant potential rewards. While the associated risk is elevated, diligent research and analysis serve as effective tools for mitigation.

Bonds

If you are more of a conservative investor, another option to consider is bonds. Bonds are debt securities issued by companies, or governments to raise capital. When you buy a bond, you essentially lend money to the issuer, and in return, the issuer agrees to make periodic interest to the bondholder. Bonds have fixed maturity dates, which is the date the principal amount is repaid to the bondholder. On top of that, bondholders have higher priority than preferred stockholders, which makes it a more secure investment. However, bondholders have no ownership in the company and, as a result, do not benefit from the company’s capital appreciation.

Bottom line

Developing the right mindset about stocks before diving into investing is crucial. It shapes your actions and, consequently, your likelihood of success. Remember, investing in stocks, particularly common stocks, comes with inherent risks. Therefore, it’s essential to evaluate your risk tolerance and investment strategy to choose the most suitable investment option.

Read “How to Start Investing: Full Beginner’s Guide On Stocks” and start your investing journey today!

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