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Stock: Definition & Basic Guide

Stock: Definition & Basic Guide

What is stock?

Stock is a certificate of the amount of money that shareholders have invested in the business. It is issued in the form of a written certification, or journal entry, which helps to confirm the shareholder’s ownership of shares and the investor’s legitimate benefit in partaking in the business of that enterprise.
For example: if a company has 1000 shares outstanding and one person owns 10% of the assets and enjoys 10% of the company’s total profits. Companies regular issue shares to raise the capital for their business

Some characteristics of stock

  • Stocks are signs of value, the real estate of the owners

  • A stock is a perpetual security. The duration of a stock is closely tied to the due of the company issuer. Maturity is equal to the life of the company. Once a company becomes bankrupt, the shares will no longer exist.

  • Stocks are profitable, stocks’ prices witness sharp fluctuations, and they account for the most in the secondary market. They are affected by many factors and the most important one is the result of the company

  • Stocks are easily converted into cash, so the liquidity of shares is high. However, the liquidity of shares depends on the business result of the issuer and the supply-demand relationship in the market.

  • The riskiness of stocks is quite high, the reason is that the value of shares depends on factors such as the business ability of the issuer, political,economic and societal situation of the country, the whole world. Moreover, stock value is also influenced by the psychology of the majority of investors. When encountering inaccurate information, investors’ lack of understanding of shares also makes stocks more risky. Of course, high risk tends to come with the expectation of large returns. This makes the stock attractive to investors

Types of stocks presented in the market


Currently, there are two types of stocks in the market: common stock and preferred stock.


Similarities

Common stock and preferred stock are both stocks, certificates of ownership in a company:

  • A tool to raise  capital for businesses

  • Issued by a joint-stock company

  • Duration: medium and long-term ( above one year)

  • Issued via Ministry of Finance and The State Securities Commission

Differences

  • Yield

Common stock: It has an unstable yield, depending on the business result of the company and after paying dividends on bonds and preferred shares

Preferred stock: It has a stable yield at a fixed percentage on the value. Depending on different types of preferred stocks, there are different dividend policies: cumulative preferred stocks, non- cumulative preferred stocks, and participating preference stocks .

  • Dividend

Common stock: Dividends vary, depending on the business result

Preferred stock: Fixed dividends

  • The number of stocks:

Common stock: Many

Preferred stock: A few

  • Voting right

Common stock: Have the right to vote in the shareholder’s meeting

Preferred stock: Have no right to vote in the shareholder’s meeting, except for voting preference shares

  • Administration right

Common stock: Have the right to participate in the management of the company

Preferred stock: Have no right to participate in voting and electing to the board of directors.

  • When the company goes bankrupt

Common stock: The owner of common stocks is the last person to receive the liquidation

Preferred stock: Preferred shareholders receive money for liquidating assets before the common shareholders.

  • How do investors buy stocks?

Investors have two ways to buy stocks:

First, they buy stocks directly from the company issuer:

  • This is often the case in start-up companies. They will make calls for large organizations and big companies to invest in, large companies in turn will receive the proportion of the stocks from the start-ups.

  • Investors can participate in the management, administration, technology transfer, management methods so that start-ups can grow and dominate the market

  • And when the business is listed on the stock exchange, they will sell the stocks to other investors and make  profits

  • If you have seen Shark Tank Vietnam, it is a good example of this form of buying stocks.

Second, they can buy and sell on stock exchanges ( through a certain shareholder)

  • After a company’ s initial public offering, its shares will be available for investors to buy and sell on an exchange. Investors will use a brokerage account to buy stocks on the exchange, this account will list the buy price or sell price (preferential).

  • The price of a stock is influenced by supply and demand factors in the market, among other factors.

Where do stock’s returns come from?


Specifically, the followings are two sources of profit you can gain once investing in stocks:

  • Gain the arbitrage (The buying price and the selling price). In other words, when you buy a stock with a low price and sell at a higher price, the difference is the gained profits

  • Gain dividends (in cash or in shares). Dividends are part of the after-tax profits distributed by the business to shareholders. The more shares you hold, the higher the profits you gain  and it completely depends on the business results of the company.

So, where could we buy stocks in Vietnam?


If you are looking for stock codes of domestic companies like Vingroup, Vinamilk, Vietnam Airline, FPT, Viettel, then you will definitely conduct trading on the following major exchanges: Ho Chi Minh stock exchange ( HOSE) for listed companies, Hanoi Stock Exchange HNX for listed companies but with a smaller scale or just established) and UPCOM stock exchange for companies already selling stocks but not being listed.


Listing on an exchange means that an enterprise  is obliged to publicize information from business activities to financial statements and must organize an annual meeting with shareholders to summarize business activities and plans for the upcoming year ( called the Annual General Meeting of Shareholders). However, not all businesses are listed because this is not a mandatory activity and requires a lot of information to be publicized; therefore, there are many large companies in Vietnam not having a stock code on the stock exchange for the purpose of transaction.


Currently, 3 major exchanges in Vietnam have cooperated  with many securities brokerage companies, those who do not register to buy directly on these exchanges can only register quickly through brokerage companies of these 3 exchanges such as ACB Securities Company, Bao Viet Securities Joint Stock Company, FPT Securities Company, SSI Securities Joint Stock Company.