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Understanding Stocks: What They Are and How They Work

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A comprehensive guide to stocks and the stock market.

description: an anonymous image of a stock market ticker board with various stock symbols and their current prices displayed.

The stock market is a complex topic that can be confusing for many individuals. However, understanding the basics of stocks is essential for anyone looking to invest in the market. In this article, we will cover everything you need to know about stocks and how they work.

What is a Stock? A stock represents a share of ownership in a public company. When you buy a stock, you are essentially buying a portion of the company. As a shareholder, you have the right to vote on important company decisions and receive a portion of the profits in the form of dividends.

Types of Stocks There are two main types of stocks: common and preferred. Common stocks are the most widely traded and give shareholders voting rights. Preferred stocks, on the other hand, do not offer voting rights but do offer a higher dividend payout.

What is the Stock Market? The stock market is where investors buy and sell stocks. It is a place where companies can raise capital by selling shares of their company to the public. The stock market is also a place where investors can earn returns on their investments through dividends and capital appreciation.

How Stocks are Valued The value of a stock is determined by several factors, including the company's financial performance, industry trends, and investor sentiment. The most common method of valuing a stock is through fundamental analysis, which involves looking at a company's financial statements and market trends.

What is a Value Stock? A value stock is a stock whose current share price is trading below its intrinsic value—for whatever reason. Value stocks are often overlooked by investors but can offer significant potential for growth and profitability.

What are Defensive Stocks? Defensive stocks are those capable of maintaining their share prices, earnings, and competitive advantages during times of economic crisis, such as a recession. Defensive stocks are typically found in industries that are not as sensitive to economic fluctuations, such as healthcare and utilities.

What is Capital Stock? Capital stock is the number of common and preferred shares that a company is authorized to issue and is recorded in shareholders' equity. It represents the total amount of money that investors have invested in the company.

Optionable Stocks An optionable stock is one where the stock has the necessary liquidity such that a market maker, like a bank, lists that stock's options for trading. Optionable stocks are attractive to investors who want to use options as part of their investment strategy.

Exclusive Dividend Stocks The most exclusive group of dividend stocks may not be what first comes to mind. Many investors are familiar with Dividend Aristocrats, which are stocks that have increased their dividend payouts for at least 25 consecutive years. However, there is an even more exclusive group of stocks known as Dividend Kings, which have increased their dividend payouts for at least 50 consecutive years.

Companies Whose Stocks Moved on the Week's News Here are seven major companies whose stocks moved on the week's news:

  • Apple (AAPL)
  • Amazon (AMZN)
  • Facebook (FB)
  • Microsoft (MSFT)
  • Tesla (TSLA)
  • Alphabet (GOOGL)
  • Johnson & Johnson (JNJ)

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