What is a Stock?
A stock (or equity) is a security that represents the ownership of a portion of a company. This entitles the owner of the stock to a proportion of the company's assets and profits equal to how much stock they own. Units of stock are called "shares."
Stocks are bought and sold predominantly on stock exchanges, though there can be private sales as well, and are the foundation of many individual investors' portfolios. It has to be noted that these transactions have to abide by the government regulations which are meant to protect investors from fraudulent practices.
Stocks vs. Bonds
Stocks are issued by companies to raise capital, paid-up or share, in order to grow the business or undertake new projects. There are important distinctions between whether somebody buys shares directly from the company when it issues them (in the primary market) or from another shareholder (on the secondary market). When the company issues shares, it does so in return for money.
Bonds are fundamentally different from stocks in a number of ways. First, bondholders are creditors to the corporation, and are entitled to interest as well as repayment of principal. Creditors are given legal priority over other stakeholders in the event of a bankruptcy and will be made whole first if a company is forced to sell assets in order to repay them. Shareholders, on the other hand, are last in line and often receive nothing, or mere pennies on the dollar, in the event of bankruptcy. This implies that stocks are inherently riskier investments that bonds.
Stocks Outperform Other Investments over long term
Based on historical data, the stock market has shown to deliver higher returns to investors over time when compared to other investment options like Fixed Deposits, Bonds, Savings Account, etc.
Investing in stocks is an excellent way to grow wealth. For long-term investors, stocks are a good investment even during periods of market volatility — a stock market downturn simply means that many stocks are on sale.
Investment in stocks has many benefits
1) As economy grows, you also grow: India is a fast growth major economy, so as economy grows, so do company earnings. To put it simply - growth of economy creates more employment, which in turn creates higher sales and revenues and profit. This results in faster wages growth helping drive consumer demand, more sales and more corporate earnings.
2) Beat inflation: Over the last decade, Sensex has averaged an annualised return of 15%. That's much higher than average inflation 6% during the same period. This positive net return, can help create a good wealth, when held over long term.
3) Buy with ease: Investing in stocks is so easy. You can purchase it through online brokers or a financial planner. Setting up an account is so easy, so you can start buying stocks in minutes. Some financial technology companies like Finkompas let you buy and sell stocks at very low cost.
4) Sell with ease: Selling a stock is also easy. In the trading window, you can sell your stock any time. This is quite useful as it ensures quick liquidity in case of financial need or to cut loss.
5) Invest as per your goals: Depending on your financial goals and age, you can go for stocks which either provide good capital appreciation or pay good dividends.
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Disclaimer: The views expressed here are of the author and do not reflect those of Finkompas.
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