When you buy stocks (also known as shares or equities), you become a part owner in a business or a 'shareholder'. In general, equities carry more risk, but can also provide a higher potential return. You can make money on a share in two ways:
- If the share increases in value
- If the company pays a dividend
Dividends may be paid out to shareholders if the company has made a profit and allocates some of the profits to its shareholders. The amount you receive depends on various factors, including how many and what kind of shares you own. There is no guarantee that the company will pay dividends each year, and no guaranteed amount.
The value of a share can fluctuate – sometimes frequently and sometimes by a lot. This is because shares are exposed to various types of market risk, including the size of the market, financial stability of the company, general economic conditions and exposure to fluctuations in currency values. If you sell a share for more than you paid for it, you will have a capital gain. If you sell it for less, you will have a capital loss.
As a common shareholder, you are generally entitled to:
- Dividend payments
- Voting rights to elect directors and to vote on certain major corporate decisions at shareholder meetings
- A claim on remaining company assets if the company dissolves (after tax authorities, bond holders, employees, creditors and preferred shareholders).
Unlike common shares, preferred shares have restricted or no voting rights, but they may come with special features, such as the right to redeem shares at certain times or to convert them to common shares at a certain price.
As a preferred shareholder, you are generally are entitled to:
- Fixed dividend payments (paid before common shareholders)
- A claim on remaining company assets if the company dissolves (before common shareholders, and up to the face value of their shares).
You can buy equities through an investment professional or a firm registered with FCNB. A full-service dealer will offer advice and charge a commission for its services each time you buy or sell shares. More experienced investors may use a discount broker. This type of dealer charges lower fees but does not provide any advice. This may expose investors to higher risk if they do not take the time to read and fully understand all important documents associated with the investment.