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Stocks, also known as equities or shares, are financial instruments that represent partial ownership in a company. When you buy a stock, you own a small piece of a company and that entitles you to a portion of its assets and profits.
When people talk about “stocks,” they are usually referring to common stocks. However, there are two main types of stocks: common stocks and preferred stocks.
Common stock is a type of stock that typically carries voting rights and may receive dividends. Common stocks can be issued in multiple classes, such as Class A, Class B and Class C, each with distinct voting rights. For example, Alphabet (Google) has A, B, and C shares, but only A and C trade publicly on exchanges.
Preferred stock is a type of stock that typically does not have voting rights. However, preferred stockholders have priority when it comes to receiving a share of the company’s earnings and dividends. In the event of bankruptcy, preferred stockholders also have precedence over the company’s assets, while common stockholders only receive any remaining assets.
Companies are typically categorized by their market capitalization, which is the total value of all of a company’s outstanding shares. Market capitalization, or market cap, is calculated by multiplying the number of a company’s shares by the current share price. Companies are categorized into three segments based on their market cap: small cap, mid cap, and large cap.
Large cap
Large-cap companies have a market cap of USD 10 billion or more. These companies tend to generate consistent yet modest growth in investment terms. That’s because large-cap stocks have already experienced significant levels of growth to reach their current market cap status. Companies with market cap above USD 200 billion are known as mega cap companies
Mid-cap
Mid-cap companies have market cap between USD 2 and 10 billion. These companies tend to have more headroom for growth in the context of the ceiling of their respective share prices. Mid-cap companies tend to be more volatile than large cap companies.
Small cap
Small cap companies have market cap between USD 250 million and 2 billion. These are typically newly formed companies that may not yet be profitable. While they offer significant growth potential, they also carry higher risks compared to well-established companies. Companies with market cap below USD 250 million are known as micro-cap.
Stocks are generally liquid assets which means that they can be easily bought and sold on exchanges. However not all stocks have the same level of liquidity. For example, large cap companies tend to be more liquid than small cap or micro-cap companies.
Stocks are traded on an exchange. The stock market is the collection of all stock exchanges or venues where shares of public companies can be bought and sold. To be listed (or made available to trade) on a stock market, the issuance of shares typically begins through a process called an initial public offering (IPO) in what is known as the primary market.
Following the IPO, shares of a given company will be available for purchase or sale on the stock market. When you buy shares on the stock market, you are buying from existing shareholders, not from the company itself. This is known as the secondary market.
In modern times, stock exchanges are largely electronic venues, a sharp contrast to the hectic physical venues of the past. Each stock will have its own order book, an electronic list of buy and sell orders for that specific stock. The orders to buy are known as bids, and the orders to sell are known as offers.
Every listed company has a name and a ticker symbol. The ticker symbol is a unique combination of letters (and sometimes numbers) used to identify a company on the stock market. For example, TSLA is the ticker for Tesla. It is a heritage of the old days when stock trades were transmitted via telegraph lines. It was simply faster to use the ticker instead of the full name. For a trade to execute, a buyer and a seller must match each other in price. Overall, the order book provides real-time visibility of the amount of stock available to buy and sell at various prices, allowing market participants to gauge activity and make informed decisions. If there is a lot of demand for a stock, the bid side of the order book will likely grow quickly, and the price will move higher, whereas if there is more supply, the offer side will grow more quickly, and the price will move lower.
Exchanges operate during regular trading hours and, for some, also during extended hours, which occur before or after the regular trading hours.
One benefit of extended hours trading is that investors can react quickly to market events occurring after an exchange has closed. However, it’s important to note that liquidity tends to be lower and volatility higher during extended hours due to fewer market participants.
Investing in stocks is a popular strategy for individuals looking to grow their wealth over time. However, it comes with inherent risks, as stock values can fluctuate significantly, and there is always the possibility that a company may go bankrupt.
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