What are stocks?
Get a better understanding of what stocks are and how you can incorporate them into your U.S. trading or investing strategy.
How do stocks work?
A stock represents a share in the ownership of a company, including a claim on the company's earnings and assets. As such, stockholders are partial owners of the company. When the value of the business rises or falls, so does the value of the stock.
Stocks are generally bought and sold electronically through stock exchanges, the two primary ones in the United States being the New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASDAQ). While some companies sell stock directly to investors, most only sell stock through a brokerage such as Schwab.
Investors buy and sell stocks for a number of reasons including the potential to grow the value of their investment over time, to potentially profit from shorter-term stock price moves, or even to earn an income by investing in dividend-paying stocks. The reasoning behind these decisions is often derived from qualitative and quantitative techniques like fundamental analysis or technical analysis. Keep in mind that the price of a stock can fall as easily as it can rise. Investing in stock offers no guarantee that you will make money, and many investors lose money instead. Payment of stock dividends is not guaranteed and dividends may be discontinued. The underlying common stock is subject to market and business risks including insolvency.
Types of stocks.
Learn about three main types of stocks, as well as some potential advantages and considerations.
- Common stock
- Preferred stock
- American Depositary Receipts (ADRs)
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Definition>Common stockA stock represents a share in the ownership of a company, including a claim on the company's earnings and assets. As such, stockholders are partial owners of the company.>Fractional shares of stock also represent ownership of a company but at a size smaller than a full share of common stock.Preferred stockPreferred stocks (or preferred securities) are hybrid investments that share characteristics of both stocks and bonds. They can offer higher yields than many traditional fixed income investments, but they come with different risks.>American Depositary Receipts (ADRs)Many non-U.S. companies that would otherwise be unavailable or inconvenient to trade do trade in the U.S. markets as ADRs (receipts for shares of the foreign stock issued by U.S. banks). They are denominated in U.S. dollars and pay dividends in U.S. dollars.>
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Advantages>Common stockPotential for higher long-term return.>Voting rights (does not apply to owners of fractional shares).Liquidity depending on trading volume.Preferred stockDividends are typically higher and fixed.>Share price experiences less volatility compared to common stock.Preferred shareholders are more likely to recover at least part of their investment if company goes bankrupt.American Depositary Receipts (ADRs)Allows investors to buy and sell shares of non-U.S. companies on U.S. exchanges denominated in USD.>Dividends are paid out in USD.Listed ADRs may be marginable and may have options.Investors may be able to access financial information more easily than if you invest directly overseas with ADRs.
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Risk Considerations>Common stockDividends, if available, are often lower, variable, and not guaranteed.>Stock price and dividend may experience more volatility than preferred stock.More likely to lose investment if company goes bankrupt.Preferred stockLower long-term growth potential, if any.>No voting rights in most cases.Generally less liquid than common stock.American Depositary Receipts (ADRs)Exposure to fluctuations in a foreign company's local currency could affect value of investments.>Political or economic events in a foreign company's home country could potentially harm your investment.
How to trade stocks.
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StepFind a stock to buy and evaluate
Starting with fundamental analysis and expert ratings can be a good way to search for stocks in an industry or sector you're interested in. Fundamental data can tell you how a business is growing, stabilizing, or deteriorating, while ratings reflect the outlooks of various financial firms.
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StepDecide when to buy the stock
For investors seeking short-term returns, stock charting tools can help you identify whether the stock's price is on an uptrend or a downtrend and help signal where the stock price could be headed next.
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StepPlace your order
Placing an order includes entering the stock symbol, desired trade action (buy or sell), number of shares you want to buy, as well as the order type reflecting the price you're willing to pay for the stock.
Why invest in U.S. stocks with Schwab?
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US$0 online listed equity commissions¹
Get commission-free online listed trades. See how we compare.
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Intuitive platforms
Trade stocks using our web, mobile, or advanced platforms. See them in action.
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Trading specialistsGet focused support from experienced investing professionals.
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Premium research
Get actionable stock trading research and insights from Schwab market commentaries and third parties, including Morningstar®.
Common questions
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Yes, when you sell shares of a stock that you do not own, this is referred to as a short sale. You borrow the shares from a lender (like a broker-dealer) and sell in the open market with proceeds from the sale credited to your account. Eventually you must purchase the same number of shares borrowed and return them to the lender – this is referred to as closing out or covering the short-sale position. You must have a margin account in order to short stock. This is not a strategy for inexperienced investors.
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Value and growth stocks are two different type of stock. Growth stocks are anticipated to grow at a rate above the average for the market. Value stocks are those that tend to trade at a lower price relative to their fundamentals. To determine whether a stock is underpriced, market analysts look at a company’s fundamentals (such as dividends, earnings, and sales) relative to its current share price. Growth stocks tend to be more volatile investments and generally do not pay dividends.
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Stock dividends are a payment in the form of additional shares, instead of cash.
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Sector investing is the strategy of investing across an entire sector (ex: technology, financial, consumer staples, etc.), typically using mutual funds or exchange-traded funds (ETFs).
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We work hard to ensure your equity orders are routed to destinations that have provided high-quality executions over time. We seek out top-performing securities exchanges and liquidity providers and rigorously evaluate execution quality.
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A stock split is a type of corporate action that occurs when a company's board of directors decides to divide the company's outstanding shares into a larger or smaller number of shares. Splits are a change in the number of outstanding shares of a company’s stock without a change in shareholders' ownership percentage in the company. For example, with a 2:1 split, a client will receive two shares for each share owned prior to and through the open on the security's split ex-dividend (or "effective") date. Also, the share price is adjusted so the value of ones holding in the split stock is unchanged, absent any price changes post-split.
Start investing in the U.S. today.
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Start investing in the U.S. markets today.
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