What are stocks? In this article, I discuss everything starting investors need to know about stocks and investing in them.
In this article:
- What Are Stocks and How Can I Earn from Them?
- What Are Some Terms I Should Know for Stock Investing?
- How Should I Buy or Sell Stocks?
- What Are Other Ways to Invest in Them?
“What Are Stocks?” and Other Stock Investing FAQs
What Are Stocks and How Can I Earn from Them?
Stocks represent somebody’s percentage of ownership for a public company. This is physically represented by a stock certificate, which is a physical document that shows how many shares an investor has.
Most stocks nowadays are kept by a custodian through a brokerage account. Since storing paper certificates can be both costly and risky, a broker and custodian performs these services for investors.
Of course, like any investments, an investor can get profits or losses, whether through dividends, capital gains, or capital appreciation.
- Dividends are what a shareholder of a company gets when the company gives out shares of their profit or revenue. To get dividends, an investor should multiply their number of shares to their dividend per share.
- Capital gains are what investors get when they sell a stock at a higher share price than the original buy price.
What Are Some Terms I Should Know for Stock Investing?
- Market capitalization refers to how much the stock market values the company. You can compute for the market capitalization by multiplying the number of shares with the share price. Note though that the market cap can change every day the stock exchange is open.
- Large-cap stocks are public companies in the market with a market capitalization of over $5 billion. More often than not, large-cap stocks are also blue-chip.
- Blue-chip stocks refer to those investors consider to be well-established shares that can operate even in economic downturns. This is because these have a long history of profitability or reputable business operations.
- Mid-cap stocks, on the other hand, have a market capitalization of $1 to $5 billion.
- Small caps stocks have a market cap of lower than $1 billion.
- Common stocks refer to what investors usually find. With this, the investor gets the right to vote on corporate actions as well as participate in the growth of the company. Investors who invest in these are the last priority for assets if the company becomes bankrupt.
- Preferred stocks don’t give investors voting rights, but they generally pay dividends more often than common stocks. Also, investors with this type of stock will receive assets before investors with commons stocks if the company liquidates and shuts down.
- Dividend stocks provide regular dividends. Investors who want this type of income can invest in a company with a proven track record of giving dividends. This can either be a cash dividend where the company sends cash to the investor or a stock dividend where it sends additional shares instead of cash.
- Growth stocks are those from companies with a high feasibility of growing share prices within a timeframe.
Depending on whether the investor looks for dividends, capital growth, or a portfolio showing a mix of both, knowledge about the language of investment markets can help, especially with beginner investors.
How Should I Buy or Sell Stocks?
No one can predict the market all the time. When buying or selling stocks, investors usually turn to two methods of analysis:
- Fundamental analysis, which mainly uses research of the companies valuation, business operations, profit and loss ratios as well as other formulas. Usually, investors who use fundamental analysis is in it for the long haul. They also usually buy when they think the stock is undervalued and sell when they think it’s overvalued.
- Technical analysis involves using price charts and other technical indicators to buy or sell. Rather than read through reports, investors try to analyze the market itself rather than the company.
There is nothing stopping an investor from using both. However, some prefer one over the other.
Again, nothing is guaranteed in the market. What investors can do instead is to buy or sell smart by knowing when to enter or exit a trade.
You don’t need a degree in finance to enter the market. You simply need to comply with the requirements for opening a brokerage account with a custodian.
What Are Other Ways to Invest in Them?
Other than going through the buy or sell system directly, investors can:
- Invest through a mutual fund.
- Buy shares of an exchange-traded fund (ETF).
- Consult their retirement or investment adviser.
- Use their Traditional or Roth IRA.
- Take advantage of the employer-matched contributions for your 401(k).
A mutual fund has an administration fee, and growth may not be as high if you compare it to investing in specific stocks. However, mutual fund managers have the expertise and experience that most investors don’t have.
On the other hand, an ETF or exchange-traded fund is basically a basket of stocks with minimal fees. Generally, these ETFs invest in a sector, a group of companies or a yearly or quarterly Top 30 companies, which can be inexpensive.
A retirement or financial adviser can help you not just with investing but also retirement planning and financial budgeting. This option goes for a more holistic and personalized service.
Most traditional IRAs have managers who take care of their investment. 401(k) plans also provide the same service as IRAs, with the added bonus that the employer gives a contribution, increasing your capital investment without extra money out of your pocket.
Don’t invest more than what you can afford to lose.
Diversify your investments not just with different types of stocks but also with other investment vehicles. Bonds, mutual funds and even commodities, like gold and silver, can match and sometimes even exceed stock growth and capital gains.
Knowing as much as you can about the market and whatever assets you’re interested in can go a long way in helping you grow your nest egg and minimizing the risks in your investment. Talking with an expert can also help.
Do you have any clarifications about investing in stocks or other assets and how you can take advantage of them? Do you think you’ll start investing in stocks soon? Let us discuss in the comments section below!
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