What Are Individual Stocks?

When one invests in an individual stock, he or she is purchasing ownership. If an individual invested in 100 shares of a public company, that individual would have a percentage of ownership in that company.  Companies initially go public to offer shares to investors to raise capital to start, expand and/or grow the company. Once the initial shares are purchased, the shares then can be bought and sold on an exchange or electronically between buyers and sellers, usually facilitated by stock brokers.

You can make money through stocks in two different ways. One way is through the price appreciation of the stock. The other way is to make money through dividends, which are the profits of the company paid to the shareholders.

The main advantage of investing in an individual stock is that there is unlimited growth potential. You can also invest in a stock that generates income. There may also be some tax advantages. There are no taxes paid on the appreciation of the stock until it is sold, usually at a long-term capital gain tax rate if held more than a year. Knowing your investment goal in purchasing a stock is critical as there are many different types of companies to invest in with differing objectives such as growth, aggressive growth or income.  Growth companies pay lower to no dividends while value companies generally pay dividends.

As with any investment, there are risks involved. Individual stocks have unlimited growth potential, however, they also have loss potential. If a company were to go bankrupt, the stock investor could very likely lose their entire investment. As history has shown, even the largest of companies are susceptible to bankruptcy. Investors who would like to participate in the stock market but would like some of their risk mitigated by having a diversification of stocks often utilize tools like mutual funds, ETFs, managed accounts or variable annuities.