Most of you must have come across the financial instrument Stocks (or shares) at some time or the other in your lifetime. Stocks are one of the world's most popular and widely used financial instruments.
So if you are someone who has wondered what stocks are and how to invest in them don't worry reading this will get you covered. The Making Sense of Stocks series will make you understand the stock market and its functioning in layman's terms.
In this blog post, we will cover the fundamental concept of stocks, the reasons why companies issue them and provide a brief overview of the benefits of stock investing. The aim of this blog is to establish a foundation and gradually delve deeper into the topic of stocks, which is the reason why the content of this blog is basic.
NOTE - The words stocks and shares would be used interchangeably.
Meaning
Shares (or equity shares) refer to units of ownership in a company. If a person is per se holding 10% equity shares of a company that means that the particular person is a 10% owner of the company.
When investors purchase equity shares they earn certain voting rights as they become owners of the company up to a certain proportion.
Why Do Companies Issue Shares?
You might be wondering why would companies want to give away their equity by issuing shares. The answer to the question in simple terms would be to raise capital.
Companies are in constant need to raise capital in order to fund their operations, finance future projects, finance marketing campaigns, and various other business needs.
The reason why companies choose the issuance of shares as a method to raise capital is because if companies had raised capital by taking loans then they would have been under a legal compulsion to pay it back. If the company had failed to repay the loan it would have led to the sale of assets of the company and in severe cases even bankruptcy.
Why Should One Invest in Stock Markets?
Investing in stocks has a lot of benefits like-
1) Beating Inflation - By definition inflation is the rate at which the cost of living increases. In layman's terms, inflation refers to an increase in the prices of goods and services. So, inflation leads to a fall in the value of money held by people. Investing in stocks allows our money to grow thus mitigating the risk of inflation.
2) Higher Returns- Historically shares have provided more returns than instruments like bonds, Fixed Deposits, etc. However, it should be noted that shares are also a riskier instrument to invest in.
3) Liquidity- Liquidity in layman's terms refers to how quickly can assets be converted into cash. Stocks are highly liquid assets and can be readily converted into cash.
4)Achieving Financial Goals- Stocks help in achieving long-term financial goals like retirement plans, buying real estate, funding higher education, etc.
That's it for this blog, in the next blog Types of Stocks will be covered.
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