Understanding Stocks: A Simple Guide for 20-Year-Olds

If you're in your 20s, you might be starting to think about your financial future and how you can invest your money. One option that you might have heard of is stocks. But what exactly are stocks, and how do they work? Here's a simple guide to help you understand:

What are stocks?

Stocks are securities that represent ownership in a company. When you buy a stock, you are buying a share in the company, which entitles you to a proportion of the company's assets and profits based on the number of shares you own relative to the total number of outstanding shares. For example, if a company has 1,000 shares of stock outstanding and you own 100 shares, you own and have a claim to 10% of the company's assets and earnings.

There are two main types of stock: common and preferred. Common stock typically gives shareholders the right to vote at shareholder meetings and to receive any dividends that are paid out by the company. Preferred stock typically does not come with voting rights, but it may have a higher priority for dividends and the repayment of capital in the event that the company goes bankrupt.

Stocks are traded predominantly on stock exchanges, and are subject to government regulations meant to protect investors from fraudulent practices. Historically, stocks have outperformed most other investments over the long term, but they also come with risks, such as the potential for loss if the company or the stock market as a whole performs poorly.

As a shareholder, you do not own the corporation itself, but you are considered an owner of the issuing company. The board of directors is responsible for increasing the value of the corporation, and may do so by hiring professional managers or officers to run the company. Shareholders do not manage the company themselves, but they do have the right to vote in shareholder meetings and receive a portion of the company's profits through dividends.

If you own a majority of shares in a company, your voting power increases, allowing you to indirectly control the direction of the company by appointing its board of directors. This is especially important when one company buys another, as the acquiring company will buy all the outstanding shares.

It's important to note that owning stock does not mean you own the company's assets. Corporate property is legally separate from the property of shareholders, which limits the liability of both the corporation and the shareholder. If the corporation goes bankrupt, a judge may order all of its assets sold, but a shareholder's assets are not at risk. On the other hand, if a major shareholder goes bankrupt, they cannot sell the company's assets to pay their creditors.