What are stocks and they can be profitable

Stocks are an instrument of participation in the ownership of a company. In particular, a share or stock represents the minimum quota into which the capital of a particular type of company is divided (precisely called joint-stock companies).

The value of each share is usually determined by the company’s articles of association; otherwise, the security must indicate the principal amount and the total number of shares issued. The nominal value does not necessarily coincide with the issue value (the shares can be issued by requesting a sum higher than the nominal value, i.e. with a “premium”), nor with the market value of the security (determined by the match between supply and demand on the market).

What are stocks? We can put it simple by defining them credit instruments, i.e. instruments that incorporate a right that can be easily transferred to another person. The rights and obligations incorporated may fall under the ownership of the holder (registered shares) or whoever is in possession of the title at a given time (bearer shares). Only savings shares can be in bearer form.

Ordinary shares give the holders equal rights, including the right to vote in shareholders’ meetings. However, there are other categories of shares as well.

The company statute may provide for particular types of shares, each characterized by a different set of rights. For example:

Preferred shares: grant particular privileges (further returns on the assignment of dividends or pre-emption right in the distribution of assets in the event of liquidation) but limit the right to vote only to extraordinary shareholders’ meetings;

savings shares: confer certain economic advantages (in the distribution of profits and in the repayment of capital) but prevent participation and voting in the company’s shareholders’ meetings. By law they are the only shares that can be “bearer”;

dividend-right shares: they do not give the right to vote in shareholders’ meetings but allow for the sharing of profits remaining after payment of ordinary shares;

shares with increased and multiple votes: with the same nominal value compared to the other shares issued by the same company, they confer a greater number of votes in the shareholders’ meeting.

Stock options can also be:

Listed: the negotiation (purchase and sale) of securities takes place on the financial market;

Unlisted: negotiation usually takes place directly with private agreements between shareholders and this can make buying and selling more complicated.

In multilateral trading systems (MTF): with respect to regulated markets, they can also be managed by subjects other than market management companies (banks or SIMs for example) provided they are authorised; by systematic internalisers: banks and other intermediaries authorized to trade financial instruments on their own behalf, in execution of orders from customers;

over-the-counter (OTC): with its own financial intermediaries, outside any market.

Who is it useful for?

To businesses, because each share represents a form of financing for their business for companies.

To the aware investor/saver, because with the purchase of the shares (the number is proportional to the amount subscribed) one receives the right to administrative (such as the right to vote in the shareholders’ meeting) and economic (distribution of profits for example) participation in the company. Buying shares can be a way to invest your savings in an instrument whose return varies according to the company’s performance. The different “categories” of shares give the investor the opportunity to make investment decisions in line with his strategies (greater interest in returns or management?) or with his risk tolerance.

Points of attention

Owning shares means participating in the business risk of the company in which you have invested (we are talking about risk capital). This means that the return (dividend) will depend on the performance of the company’s results: in the face of the potential opportunity for returns higher than those of other securities (for example bonds) there is – and it is essential to be aware of this – a potential danger of losing everything or part of the invested capital (risk), for example in the event of bankruptcy of the company resulting in the liquidation of its assets.

Interest and other costs

The costs in the strict sense associated with investing in shares concern the commissions due to the intermediaries involved for the purchase and sale of securities and the cus removal of the same (it is necessary to open a “securities account”). Any income from investing in equity securities is subject to taxation.

Rules

Ownership of a share grants the holder a series of economic and administrative rights: to receive the share of profit that the company has established (at the meeting) to distribute to the shareholders (the dividend);

to receive reimbursement of the value of the share (permanent) resulting from the liquidation assets in the event of dissolution of the company;

to withdraw or exercise an option (the latter in the event of a share capital increase);

to participate and vote in the assemblies;

to challenge the invalid shareholders’ resolutions;

disclosure and control, for example by consulting the corporate books and the draft financial statements.

Recurring errors

Be guided by emotions: optimism, euphoria, pessimism, regret, are all emotional states that influence our investment decisions. For example, optimism could make us more willing to take excessive risks. Or the fear of making mistakes could lead us to follow the choices of the masses (an effect known in finance as “herd behavior”) even when they are not appropriate.

Poor diversification: the value of a single share is linked to the fate of a single company, so holding shares of

only one type is very risky. The risk could be reduced by diversifying, i.e by investing in different stocks (for example, from different product sectors or countries). However, this behaviour is not yet widespread enough, especially among small investors.

Loss aversion: while not accepting the loss linked to an investment, one can decide to take other risks in order to “get back to balance”, with potentially harmful results. In fact, several studies show that the “pain” experienced following a loss is greater than the “pleasure” of a gain. That’s why people tend to sell early stocks they’re making money on, thus missing out on the opportunity for higher income.