Common stock is a type of share capital issued by a corporation or entity. Buyers of common shares are called shareholders.
Common stocks are fractions of shares or a percentage of the entity's interest. Equities represent a proportionate share of net assets, income, cash flows, dividends, etc. Shareholder powers generally include voting rights in matters requiring shareholder approval and the election of directors of the entity.
When a company needs to raise capital to start or expand its business, it can borrow money or sell shares of investors (shareholders) or assets of the company.
Equity ownership offers the highest long-term rate of return; More than bonds and cash. Common stocks have generated a real return of more than 6% over the long term, making it one of the best tools for dealing with inflation.
Property is one of the foundations of capitalism and a free enterprise system. Common stock provides benefits to the issuer, the shareholder and society in general.
The issuer collects capital to produce goods or services. The shareholder receives fractional profits from a business that are much higher than what they would typically be able to contribute. The company benefits from the assets and services of the issuing company, as well as the activities of the company. And do not forget the fees paid by the company and the shareholders.
Ordinary shareholders have no collateral but accept the risk in return for higher potential profits than other, more secure investments. However, the liability of the shareholder is limited to the price paid for the ordinary shares.
Common stocks can be very volatile and generally considered a high-risk investment class. In the event of a liquidation of the company, ordinary shareholders are in the last line of creditors, bondholders, and preferential shareholders.
The price that a common stock can change for more or less than its real or intrinsic value. That's why it's necessary to know the value of the stocks you buy. To reduce the risk of having common shares, you want to buy shares at a discount to their intrinsic value.
If it is possible to buy a share smaller than the real one, the difference between the price paid and the actual amount is defined as a safety margin. The higher the perimeter of safety, the lower the risk and the higher the retention potential for maintaining this investment.
All investors with a long-term investment horizon should consider owning common shares. The benefits of holding stocks far outweigh the risks for investors willing to do their homework, track their value and accept a long-term investment horizon.
Now that you have a preamble of common shares consider the increased risk of common shares. According to Research
As someone who is immersed every day in the investment markets, there are things you note when you manage the data about them, you realize that you do not just imagine things. This is the case concerning the increased risk of holding individual securities.
Here is a summary of what they see and some facts to support:
1. The long-standing stock market, following the weak financial crisis of 2009, encouraged investors to hold and speculate on individual stocks.
2. This affected the mutual fund industry, which recorded a steady stream of assets. Translation: Paying someone to diversify your inventory is a lower priority than in the past.
3. ETFs are on the scene, but advisers who use them are focusing on "buying the market," so the investment portfolio is the best-known name of the major stock indices, the S index& P 500.
4. The bull market has created an environment in which some bad eggs in the portfolio do not pose significant problems, as the market is usually a tide that lifts most boats.
5. The bull market will not continue forever and will change the way individual stocks are affected when they receive many investors still appreciate bad news (earnings, product announcements, government interventions, commodity price changes, etc.).
In my opinion, the bottom line for me is that while individual securities can play a central role in portfolios for long-term capital growth, its usefulness in other situations can be maximized for some time. Specifically, I included in my portfolio the use of individual stocks for dividend income. This does not warrant the increased risk when a one-year dividend can be lost from the stock price in a single day. There are several other ways to achieve this revenue and growth goal without having a bottle of Zantac in the earnings season.
Think about anything you want out of your stock portfolio and do not be fooled (you or anyone else) into thinking that investing in individual stocks is something different than what it is. It's a wonderful time to take stock of your risks and confirm why you are doing it. I know who I am
Roland Zita, CPA