What Is A Stock?

Stocks represent ownership claims on a company’s net assets. As an asset class, stocks play an important role in portfolio management as it can provide long term growth potential and a steady stream of income through dividends.

iFAST Research Team
iFAST Research Team01 Dec 2016 0 Views
What Is A Stock?

Stocks, also commonly known as equities, represent ownership claims on a company's net assets. When you buy stocks of a company, you become a shareholder (or a stockholder). As a shareholder, you are a co-owner of a company – you are entitled to a fraction of the profits the company generates and have a claim on net assets if the company goes bankrupt. Over the long term, the value of a company's stock is largely determined by its business performance. If the company does well, its stock price is likely to increase, although there may be fluctuations in its stock price over shorter periods of time. Some stocks also pay out dividends, which is a portion of a company's profits that is distributed to shareholders. As an asset class, stocks play an important role in portfolio management as it can provide long term growth potential and a steady stream of income through dividends.

How Are Stocks Transacted?

As publicly traded companies can be co-owned by many investors, transacting stocks informally can be a tedious and time consuming process that involves searching for willing buyers or sellers. To overcome this complexity, stock transactions take place on a dedicated stock exchange, such as the New York Stock Exchange, the Hong Kong Exchange and the Singapore Exchange. A stock exchange acts as a 'marketplace' where buyers are connected with sellers, ensuring that stock transactions are streamlined and carried out more efficiently.

Why Invest In Stocks?

  • For investors who are willing to take on a higher level of risk, stocks have consistently offered the most potential for growth as compared to the other asset classes over the long term. While global bonds delivered an annualised return of 6.07% from 1987 – 2015, the S&P 500 Index managed a comparatively higher annualised return of 7.83% (returns in USD terms).

  • Dividends are an important contributor to portfolio returns overtime. Unlike capital gains, which are not realised until investors sell off their stock holdings, dividends provide investors with a steady stream of realised income that can be reinvested to harness the power of compounding in growing their investment portfolios.

  • Ownership in a company has its privileges. As a shareholder, you have a say in the company through exercising your voting rights. Shareholders typically receive one vote per share to participate in corporate affairs, such as the election of the company's board of directors and the passing of routine resolutions.

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