The Basics of Common Stocks

If you’re new to the world of personal finance and investing, one of the first and seemingly most overwhelming topics you likely will encounter is investing in the common equity stock market shares of publicly traded companies.

While overwhelming at first, if you simply arm yourself with an understanding of the basics of common stocks and a few facts about the stock market, you can set yourself up for greater long term success.

What is a Common Stock Market Share?

Simply put, owning a share of common stock means that you own a portion of the equity of a publicly traded company.

Naturally, the next logical question to ask after this definition is, “What is equity?” Essentially, equity is what remains of the company’s assets after all of the debt (liabilities) is paid off. This is elegantly represented with the accounting equation, Assets – Liabilities = Equity. Therefore, as a shareholder, you have a claim on the company’s assets after all debt holders are paid off. Since companies have valuable assets, the stock market shares also have residual value, and you hope that this value will increase, making you money. All that make sense? Good!

Another thing to know about is how common stock issuing benefits the company itself. By issuing additional shares of stock (selling to investors in exchange for money), the company garners additional funds it can use on the other side of the accounting equation to buy new assets or pay off debt.

Facts About The Stock Market

The stock market is a very interesting animal. Listed below are several statistics:

  • Total amount invested in the global stock market = $15 trillion
  • Number of publicly traded companies = 5,008 in the USA alone
  • Average number of daily stock market transactions = 682 million shares on the NYSE
  • Average long term stock market return = ~ 10 % annually

Conclusion

In today’s economy, you will no doubt encounter and enter the world of common stock investing at some point in your personal finance history. While it can be easy to feel overwhelmed by all the financial media, knowing a few of the basics will set you up on the path to success.