A stock is a type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings. Many companies issue stock, also known as equity, to raise money for expansion, equipment upgrades or other costly developments. Generally, investors purchase stock to realize a return on investment, which can come in the form of capital gains and/or dividends.
There are two main types of stock: common and preferred. Common stock usually entitles the owner to vote at shareholders' meetings and to receive dividends. Preferred stock generally does not have voting rights, but has a higher claim on assets and earnings than the common shares. For example, owners of preferred stock receive dividends before common shareholders and have priority in the event that a company goes bankrupt and is liquidated
Industry experts often group stocks often group stocks into categories, sometimes called subclasses. Common subclasses tend to focus on the company's size, type, performance during market cycles, and potential for short- and long-term growth. Stocks provide the ability to buy on margin and sell short, which are risky transactions for experienced investors who seek increased returns.
An investor will generally need an account at a brokerage firm (also known as a broker-dealer) to buy and sell a stock. The representative at the firm will execute the instructions on the investor's behalf, or online, where the firm's technology systems route the order to the appropriate market or system for execution. The kind of firm an investor uses will determine how the orders are conveyed, what types of services the investor will have access to, and what the fees are to trade stocks. In general, the more services the firm offers, the more an investor will have to pay for each transaction.
An exchange-traded fund, or ETF, is a type of investment company whose investment objective is to achieve returns similar to that of a particular market index. An ETF is similar to an index mutual fund in that it will primarily invest in the securities that are included in the selected market index. An ETF will invest in either all of the securities or a representative sample of the securities included in the index. The expense ratios for most ETFs are generally lower than those of the average mutual fund.
ETFs trade and are valued like stocks. They may be bought or sold throughout the day in the secondary market, like a stock on an exchange, but are generally not redeemable by retail investors for the underlying basket of securities they track. They provide the ability to sell short, buy on margin and purchase as little as one share. ETFs experience price changes throughout the day and do not have NAV calculated like mutual funds. Buying and selling an ETF generally involves the same process and commission to your broker that you'd pay on any regular equity order.