Stocks: meaning of the term, how they work and examples

“Economic stock” represent the decisions and activities that affect the economy, involving individuals, companies and governments.

In this article, we explore in detail what economic stocks are, how they work, and how they can influence the financial prosperity of individuals and companies.

The definition of economic stocks

Economic stocks refer to decisions and activities undertaken in the economy that impact the production, distribution, and consumption of goods and services. These can affect individuals, firms, or governments and are fundamental to the functioning of the economy.

The main aspects of economic stocks are:

1. Business decisions: businesses take day-to-day economic actions, from new product development to human resource management, affecting their success and overall economic health;
2. Government policies: government actions, such as fiscal and monetary policies, impact employment, economic growth and wealth distribution;
3. Investment and personal finance: individuals take economic actions through investment, savings and spending decisions, directly affecting their personal financial situation;
4. Labor market: decisions to hire, fire, or upgrade staff skills are examples of economic stocks that influence the labor market and employment;
5. International trade: economic stocks of countries in the context of international trade influence trade, diplomatic relations, and the global distribution of resources.

What it means to invest in stocks

Investing in stocks means buying a share in the ownership of a company, thus becoming a shareholder. Shareholders own shares in a company, representing a form of participation and ownership in that specific corporate entity. Here is what investing in stocks entails:

1. Buying shares: investors can buy shares in publicly traded companies through financial intermediaries, such as brokers or online trading platforms;
2. Ownership participation: owning shares means owning a part of the issuing company. The size of the ownership stake depends on the number of shares held relative to the total outstanding;
3. Right to dividends: shareholders may be entitled to receive dividends, which represent a portion of the profits distributed by the company to shareholders. However, not all companies distribute dividends;
4. Voting rights: some shares give their holders the right to vote at shareholder meetings. This allows shareholders to participate in corporate decisions, such as the election of the board of directors;
5. Participation in profits and losses: shareholders participate in the company’s profits through the appreciation of share value. On the other hand, they are exposed to the risk of losing value if the company’s performance is negative;
6. Stock market: the value of shares can fluctuate according to market conditions and the company’s financial performance. Investors may decide to buy or sell shares according to their expectations;
7. Risk and return: investing in stocks involves risk, as the value of stocks can fluctuate. However, it also offers the opportunity for significant returns, especially in the long run;
8. Portfolio diversification: investors often diversify their portfolios by holding stocks from different companies and sectors to reduce the specific risk of a single company.

Difference between stocks and bonds

Stocks and bonds are two forms of investment that people can buy in the financial markets, but they differ in terms of their nature and associated rights. Here are the main differences between stocks and bonds.

Stocks

1. Nature of investment: shares represent an ownership stake in a company. When you buy shares in a company, you become a shareholder and own a share in that company;
2. Rights of shareholders: shareholders are entitled to a share of distributed profits in the form of dividends. They can participate in corporate decisions at shareholder meetings, especially if they own voting shares;
3. Variable yield: the return on equity investments can vary according to earnings and the financial health of the company. Shareholders may profit from share price growth or dividend payments;
4. Higher risk: Shareholders assume greater financial risk than bondholders. In case of financial difficulties, shareholders are paid after bond creditors.

Bonds

1. Nature of investment: bonds represent a loan made by an investor to an issuing entity, which can be a company or a government. In exchange for the loan, the investor receives a debt certificate;
2. Rights of bondholders: bondholders receive periodic interest (coupons) on the principal amount lent. At maturity, they receive repayment of the initial principal invested;
3. Fixed yield: bonds offer a fixed and predictable yield in the form of periodic interest. The yield is not affected by the performance of the issuing entity;
4. Lower risk: Investors in bonds take less risk than shareholders. In the event of financial difficulties, bondholders have priority of payment over shareholders.

Read also: Navigating different types of bonds: a brief guide