Why you should buy stock of a company

Stocks are instruments or securities issued by a company in exchange of money to own a portion of the whole business. Stock is also known as equity share.  Total capital invested in a company is divided into number of shares. Each share stands for unit of ownership in the company.

If you bought 10% of the total number of shares issued by a company, then you are holding 10% ownership in that company.

Stocks of a publicly traded company can also be bought and sold through stock exchanges where its listed. To buy and sell shares of the publicly traded company, you need to take help of a broker.

Stock prices rise and fall each minute, hour, day and week based on so many factors such as random flow of news, earnings, market sentiments, rumors and government decisions. There is no guarantee that the company’s stock you hold will grow and you will make profit. Here are 3 important reasons why you should buy stock of a company.

To get ownership and piece of company’s earnings

Buying a stock means you are owning a certain percentage of ownership based on the total number of outstanding shares.

By getting a percentage of ownership, you are buying a claim to the company’s future earnings. This means, when you invest your hard earned money in a stock, you are buying a piece of companies profitability.

As a value investor, if you want to hold a piece of ownership, we suggest you to focus on fundamental analysis to find out the best company to invest.

To get dividend on stock

Dividend is the amount that company pay to its shareholders from the overall profit that it makes for a period. Its paid to the bank account of the shareholders in proportion to the number of shares owned by the investor. Some investors invest into the company before the ex-dividend date and sell the shares after the record date to get dividend of the company.

For capital appreciation of invested money

The goal of the investor should be to buy low and sell high. If you find a stock which is very likely be sold in the future for a higher price than its current market price, then it may be a very good investment regardless of company’s estimated true value.

Fundamental analyst uses number of financial tools to examine a company and its market price to assess its genuine present value to take a investment call. For instance, value investors before analyzing company’s fundamentals from all possible factors, first try to find out company’s price to book value, price to earnings and return on equity.

When price of a stock increases, you gain from it. This means if you sale after such increase, you will have profit. Some investors buy undervalued stocks to sell it when price appreciate.

In addition to above there major reasons of holding stocks, you will also be benefited by your rights to vote and influence in the company.

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.