Stocks are also know as equities because a share of stock is a certificate of ownership in a corporation. It is also a claim on the earnings of the corporation. Companies pay out a percentage of their earnings to shareholders in the form of a dividend. There are two different types of stock: common stock and preferred stock. Common stock represents ownership in a corporation. Holders of this type of security exercise control by electing a board of directors and voting on company policy. Common stockholders are on the bottom of the priority ladder for ownership structure. In the event of liquidation, common shareholders have rights to a company’s assets only after bondholders, preferred shareholders and other debtholders have been paid in full. Preferred stock has a higher claim on the assets and earnings than common stock. Preferred stock has a dividend that must be paid out before dividends to common stockholders, but preferred stock often has no voting rights attached to it.

Now that you understand the basics, you need to learn how to actually buy a stock. When you buy or sell a stock, you must place the order through a broker, who then transacts your business by placing the order on the market. Stockbrokers are basically salespeople. They work for brokerage houses. Brokers work at those companies. Some brokers are paid a straight salary, some are paid a commission, and some receive a base salary in addition to their commission. Full-service brokers make money every single time you place a trade. So, they have an incentive to persuade you to place a lot of trades, because that’s where they make their money. There are unscrupulous full-service brokers out there who do provide sagacious investment advice, but who are so active with your portfolio that their commissions start to eat away at your earnings. Neophyte investors have unknowingly hired these sorts of brokers, and when they get their annual statement they’re shocked to find that they made a lot less than what they thought, and in some cases actually got a negative return on their investments. So, be careful when selecting your broker.