A stock is a piece of a company that you can buy and sell on a stock exchange. Companies initially issue stocks via an Initial Public Offering (IPO) as a way to raise funds for their business.
Investors who buy stocks, in turn, become shareholders and acquire a stake in the companies they bought stock from. As Investopedia explains: "If a company has 1,000 shares of stock outstanding and one person owns 100 shares, that person would own and have claim to 10% of the company's assets and earnings".
You can earn dividends from certain stocks, since many companies distribute part of their earnings to shareholders. In addition, owning stock may give you the right to vote in shareholder meetings and have a partial say in what direction a company is heading.
In general, people who invest in stocks can profit in two ways - either from dividend payouts or asset appreciation. Let's start off talking about dividends*.
Companies pay dividends as a way to attract investors and create demand for their stock. Some investors, especially those with larger brokerage accounts, may focus their attention on dividend stocks because they can be a source of passive income. We've explored this subject in depth in another blog post - we highly recommend you check it out.
*Remember that dividend paying stocks are like any other stocks, as they may lose value. There are additional risks associated with investing in dividend-paying stocks, including the risk associated with a company’s ability to pay dividends, and risks associated with interest-rate changes, among others.
"Asset appreciation" is the name given for when the value of an asset increases (which may occur due to increased company earnings or speculation in the case of stocks, for instance). As an investor, asset appreciation is something you should have in mind since purchasing shares and selling those shares at a higher price than you paid for is a way to potentially make a profit, albeit profit is not guaranteed and there is inherent risk to trading stocks.
Another type of asset appreciation to consider is currency appreciation, which is an increase in the value of a currency in relation to another currency. For example, if you live in Brazil and you invest in the United States, currency appreciation may favor your investments if the value of the US Dollar increases in relation to the Brazilian Real. If the US Dollar loses value in comparison with the Brazilian Real, however, currency depreciation may also affect your investments.
With Passfolio, you can start investing in US stock with as little as $1 - all with no commission fees¹². We make investing in US assets accessible and even accept local deposit methods such as TEDs.
¹ Please see our fractional shares disclosure.
² Securities less than $5 cost $0.02/share. Please see our disclosures on other charges.
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Passfolio is a San Francisco fintech company democratizing investment opportunities by creating a unified, global, and borderless investment market starting with the United States Stock Market.