What are Stocks?
A stock is an investment. When you buy stock in a company, you become a part-owner of the business. This is why people who own stocks in a company are called shareholders.
Stocks are one of the most common kinds of investments made by people. The price of a single share can vary drastically but is generally quite affordable in small quantities. Investors purchase stocks in companies that they think are performing well or will perform well in the future, which can lead to one of two things: they get a good return or the value of the stock goes up and they can sell it for a profit.
Public companies sell their stock through a stock market exchange like the Nasdaq of the New York Stock Exchange. Investors can buy ad sell shares among themselves or through stockbrokers. Stock prices fluctuate due to several factors such as the wellness of the business, inflation, and more. Prices can even rise and fall several times during the same day, but stockholders typically hope to play the long game.
However, investing in stocks is always a risk. Companies can increase in value, thereby increasing the value of their shares. Or, on the other hand, they can lose value or go out of business completely – causing the investor to lose all or part of their investment.
This is why it is important to buy stock in several companies – or to put it in a better way “not to put all your eggs in one basket”.
Types of Stock
The two main types of stocks include common and preferred.
Most investors hold common stocks in a public company. Common stocks typically pay dividends, but they are not guaranteed and neither is the amount that is paid (unless the dividend is fixed). Circumstances where common stocks may pay nothing to include if the company hasn’t performed well or turned over enough of a profit.
Preferred stocks usually pay fixed dividends, which gives shareholders an idea of how much they would earn from stocks every year. Preferred stock shareholders are first in line when it comes to the company’s earnings. Some preferred stock even offers accumulated benefits, which means that if a company fails to fulfill the promised amount of returns in a year, that deficit may be carried over to the next years when the business performs better.
Furthermore, excess cash distributed by dividend is paid to preferred shareholders first, which means they earn more when the company earns more. If the company goes bankrupt, preferred shareholders are liable to receive any liquidation of assets before it reaches common-stock owners.
Your 401(k) is Stock Too
Although you may have not realized it, having a 401(k) already might already have made you a stockholder! Most employer-sponsored retirement plans invest in mutual funds, which often hold large numbers of company stocks pooled together.
If you have a 401(k), you probably already own stock, though you might not realize it. Most employer-sponsored retirement plans invest in mutual funds, which can hold a large number of company stocks pooled together.
How to Earn Money Through Stocks
As we mentioned, stocks are a riskier investment than some others, but that also means that they have the potential to reap higher rewards.
One way to earn money through stocks is to hold on to it until the value goes up and then sell it for a profit. Investors who intend to do this have a diverse portfolio of stocks in different companies. They wait and watch patiently to identify the best time to sell. Some prefer the “buy and hold” where they hold on to the stocks through good times and bad.
The other way to earn money through owning shares is to collect dividends, which are regular payments made by the company to shareholders. Think of your stock as a loan and the dividend as an interest repayment. Not all stocks pay dividends, but the ones that do typically make quarterly payments.
What Affects Share Prices?
Share prices are affected by several different factors. While the performance of the company is one of the major influencers, it is not the only one. Anything from the global economy to government policies and natural disasters can affect the stock market. Investor sentiment – how investors feel about the future prospects of a company – is also a big influencer when it comes to share prices. If investors feel confident about a company’s growth and its ability to eventually provide higher returns on investors, this could artificially inflate the company’s stock price so that it is higher than its current actual value.
How to Buy Stocks?
Investing in individual stocks is no simple feat. To make sure that you’re not throwing your money away, you will need to do a lot of research into different companies and their finances to figure out if your money will be well spent.
Two of the most important financial aspects of a company that you need to evaluate include revenue growth and earnings growth. Revenue growth is an indication of the sales performance of the company’s products and services and whether its customers are receptive to them. Earnings growth reveals how well the company is utilizing its resources to turn over a profit. These can help you identify shares that would be worth investing in and those that you should avoid, although there are several other financial ratios and tools that can also aid in that decision.
However, several investors also prefer to skip the hassle by investing through equity mutual funds, index funds, and ETFs index. Here, you let someone else do all the work. You make a single transaction and the stockbroker spreads it over a diverse portfolio of companies. The downside is that you do not get to control where your money goes.
Purchasing the actual stocks is easier than ever with the help of the investment. You can buy individual stocks through an online broker by opening a brokerage account, which doesn’t take much more work than opening a bank account. Commissions charged by online brokers for stock trades can vary, so its important to look around before settling on one.
