A stock symbolizes ownership of a company. Think of it as owning a tiny piece of a $20 bill. The bill is the company, and its value is $20. Your tiny piece? That’s one share. Shares can represent a very small fraction of a company as well, in some cases less than 0.001%. If you buy more shares, things can start looking different though.
The objective of owning a stock is that the price of your shares increase in value and you sell to someone else at this higher price. While you own a stock, you do technically own part of that company and are included in most voting decisions. An owner can choose whether they wish to participate in these votes or not. Most retail investors feel like their ownership is too little to have an impact whereas others enjoy participating in the decision making.
Most stocks are purchased and sold through a stock exchange – such as the Toronto Stock Exchange (TSX) and the New York Stock Exchange (NYSE). In order to access these exchanges, investors go through a brokerage. With the increased efficiency of electronic transactions, buying and selling stocks can be done very quickly.
Dividend paying stocks
The initial public offering (IPO) is when a company first sells their shares to the public. Once a company is public, they have certain obligations to appeal to their shareholders and one chief method is dividends. A dividend is a company redistributing some of their cash to their shareholders. A company may choose to do this monthly, quarterly, annually or not at all. Some stocks are known as consistent dividend paying companies which certain investors rely on for reliable dividend income. Other companies choose not to pay a dividend so that they may reinvest all of their cash into growing the company.
In order to qualify for a dividend payment, the stock must be owned on a specific date known as the record date. The dividend is often paid at a later time known as the payment date, but so long as you owned the stock on the record date, you will be entitled to the dividend.
Purchasing a stock
Purchasing a stock can be done in seconds through a brokerage, you just need the money and to know the stock symbol (a short code that identifies the company). To find a stock symbol, a quick search of the company’s stock online will provide it.
Stock settlement
Buying a stock may take seconds, but the actual transfer of ownership does not complete until the following business day. For instance, if you purchase a stock on Monday, you will become the owner of that stock on Tuesday. This also applies to selling a security, where you will remain the owner for one business day following the sale.
This settlement period does not prevent an investor from actively trading the security and it can be bought and sold the same day. In this case both the purchase and sale will settle the following business day and at no time will you have been the owner.
While the settlement period does not impact trading, there are specific cases where this is important such as the payment of dividends. A company that pays a dividend will only issue it to the owners they have on record on a specific date.
Summary
A stock symbolizes ownership in a company and is measured by how many shares that are owned. Investors purchase stocks to benefit from dividends, voting rights, and the prospect of selling their stock for more money than when they purchased it. Trading a stock can be done extremely quickly through a brokerage.
