Stock: Definition, Types, and Investing

Investing knowledge

What Is a Stock?

A stock represents your entry ticket to part-ownership of a company. It serves as proof that you are a shareholder of a small portion of a publicly listed company, for example, one traded on a stock market such as the Amsterdam Stock Exchange (AEX) in the Netherlands or the London Stock Exchange (LSE) in the UK. It is a kind of online marketplace for professional investors.

Owning a stock entitles you to a portion of the company’s profits, either through an increase in stock value or through dividend payments. Additionally, a stock grants you voting rights at stockholder meetings. The more stocks you own, the greater your rights and influence are. In short, whether it’s stocks in a small-cap company or a tech giant, both let you ride along with their success.

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The Origin of a Stock

The term ‘stock’ literally means ‘to have a part of something’. The history dates back to 1602, when the Dutch East India Company (VOC) issued the world’s first stocks. Citizens could buy a part of the company and benefit from the trading profits. This marked Amsterdam as the world’s first stock exchange.

What Is the Purpose of a Stock?

Stocks exist to raise money. Companies sell part of their business and use the proceeds for growth, innovation, or debt repayment. This is only possible if the company is publicly listed or plans to be.

By buying stocks, you invest in a company’s future, hoping that its value will increase over time. If the company makes a profit, dividends (a portion of the profit) are often paid out. You can receive this amount, or you can benefit from an increase in the value of your stock. For you, stocks are a way to make your money work for you.

What Types of Stocks Exist?

Stocks come in different forms, each with its own features and benefits:

• Common stocks: The most common type. You get voting rights at stockholder meetings and participate in the profits when dividends are paid.
• Preferred stocks: These are more exclusive. You get priority in dividend payments, but usually don’t have voting rights.
• Growth stocks: These focus on the future growth of the company rather than immediate profit distributions, often seen in tech companies.
• Value stocks: These are often from stable companies and traded at attractive prices.
• Dividend stocks: These provide regular profit payouts, provided the stock value increases.
• Blue-chip stocks: stocks of large, established companies. Known for their reliability, but often come at a higher price.

How Are New Stocks Issued?

Companies issue stocks to raise capital. Think of it as crowdfunding for their growth plans. This is called a stock issuance. They collaborate with banks or brokers to offer stocks through a stock exchange, such as the AEX, during an Initial Public Offering (IPO).

During an IPO, the company’s ownership is divided into stocks that investors can buy. A document is prepared with all the information for investors (prospectus), and the number and price of stocks are determined. After the IPO, stocks are traded freely on the market.

Companies that are already publicly listed can also issue new stocks to raise additional funds for, for example, an acquisition or expansion. This is called a rights issue.

How Are Stocks Regulated?

In the Netherlands, the Financial Markets Authority (AFM) oversees regulation. The AFM ensures companies follow rules, disclose important information, and don’t mislead investors. Stock exchanges also set their own trading rules.

How Are Stocks Valued?

When you start investing, valuing stocks is important. It’s like estimating a house’s value—part guesswork, part data. It comes down to comparing the market value with what you think a stock is worth (supply and demand). Key valuation methods include:

• Company performance: Strong earnings, positive growth forecasts, and solid financial health typically drive prices upward. However, please note that past performance doesn’t guarantee future results.
• Market sentiment: Investor enthusiasm or fear can greatly impact a stock’s value.
• Financial ratios: Analysts use various ratios to assess value, such as the price-to-earnings ratio (P/E ratio), which divides price by earnings per stock. This helps judge whether a stock is overpriced or undervalued.

In addition to the above, analysts consider cash flow, revenue, and trends within the sector. Economic factors, like interest rates, also play a role. And remember: prices are dynamic and change every minute while the exchange is open.

Can You Make Money With a Stock?

When you own one or more stocks, it is possible to make money. See a stock as your entry ticket to long-term wealth building. There are two main ways to make money with a stock:

Example: Making a Profit by Buying Stocks

Suppose you buy ten stocks of company A for €12 each, totalling €120. A year later, each stock has risen to €15. You sell all your stocks for €150, making a €30 profit.

Additionally, company A paid a €0.50 dividend per stock that year. With ten stocks, that’s another €5. Your total profit in this example is €35.

Please note that buying or selling stocks may incur transaction fees.

How Can You Buy Stocks?

You can buy stocks through a broker (investment platform). This is a middleman with access to the stock exchange. BUX is one such broker where you can buy stocks via the app.

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Investing involves risks. You can lose your investment.

All views, opinions, and analyses in this article should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.