Stocks with ownership

What are stocks?

If a company were a cake, then a stock would be a slice of it, a delicious piece of the company’s equity.

Unlike the slice above, stocks give you more rights and zero calories. You are entitled to a share of the company’s profit in the form of dividends, you can sell your stocks, request information about the company’s financial situation, receive a share of the remaining assets after debts are paid in case of liquidation, and benefit from pre-emptive rights in case of capital increases.

Common vs. preferred stocks

Difference number two: every cake slice is identical. Stocks come in two types: common and preferred.

Preferred shareholders are the first to receive dividends up to the level set in the articles of incorporation, but they do not have voting rights in General Shareholders’ Meetings.

If you hold common stocks, you will have voting rights, but you will receive dividends only after preferred dividends have been paid.

In Romania, all stocks of the same type grant equal rights (proportional to ownership). In other countries (such as the US), multiple share classes with different rights may exist.

So far, we know that the stocks you own represent part of a company’s share capital, that they grant rights, come in two types, and that ownership size may bring additional rights. So we know everything, right?

Fractional stocks

Starting in 2015, investing became more accessible for individual investors through the introduction of fractional stocks.

Fractional stocks allow you to own a small part of a larger share. Essentially, one cake slice is divided into smaller pieces.

One advantage is the ability to invest smaller amounts even in expensive stocks. On the downside, fractional stocks usually cannot be traded with limit orders and do not grant voting rights. Still, they allow proportional participation in dividends and other corporate actions.

Par value vs. market value

Not quite. Each stock has a par value and a market value.

The first is written in the company’s charter. The second is determined by supply and demand. When buying or selling stocks, the market value is what matters.

The number of outstanding shares is fixed at any given time and changes only if the General Shareholders’ Meeting approves a capital increase or decrease.

Finally, remember this: stock prices fluctuate freely based on supply and demand, and there is no fail-safe method to predict their evolution. Even though prices should theoretically drop by the dividend amount on the ex-dividend date, in practice this adjustment is rarely exact.

Moderate

As with all spot market instruments, an important thing to remember is that you cannot lose more than the amount invested.

Individual stocks are, on average, more volatile than bonds or some ETFs, but this is a rough assessment.