Investing in the stock market is an exciting and unusual way to make money, but many people are intimidated by the ins and outs of what can seem a complicated process. This is a shame, as the accessibility of stocks has grown in recent years. The exchange is no longer the reserve of wealthy bankers and pretty much anybody can take a punt on the stock market, although this kind of investment is not without its risks. That’s why it’s so important to be familiar with the process before investing.
This simple guide explains the basics of investing on stocks and will set you on your way:
Stocks and Being a Shareholder
You may be wondering “What exactly is a stock?” In layman’s terms, it’s a share of ownership in a company. Your share of the company becomes greater the more stock you own. You may hear the terms “share” and “equity”, but they all mean the same as stock.
Owning stock in a company automatically makes you one of the company’s Shareholders. As a Shareholder, you technically have a claim to all of the company’s assets (although depending on the size of your stock, it’s probably only a very small claim). You also have a right to a percentage of the company’s earnings and the opportunity to vote on important decisions such as candidates for the managing board of directors.
However, being a shareholder does not entitle you to a say in the day-to-day running of the business, so think twice before calling the CEO and telling them how you think the company should be run. The good news is that if the company is doing well, you’ll reap the benefits of your share of the profits. The money entitled to you is usually paid out in Dividends. The flip side is that if the company isn’t successful, you could lose all the money you have invested.
Another important point is that if the business that you have stocks in goes bankrupt or is unable to pay its debts, you are not liable to pay as a shareholder.
The Different Kinds of Stock
There are two main kinds of stock: Common Stock and Preferred Stock. Common Stock is the most common (of course) and the way it works was outlined in the previous section. The more stocks you own, the higher your returns will be in the way of profit. This method of shareholding is also the riskiest, because if the company goes bankrupt you won’t see any of the money you have invested until the Preferred shareholders have been paid.
Preferred Stock signifies a degree of ownership in a business, although it doesn’t usually come with the same voting privileges as Common Stock. Preferred Stock does, however, guarantee a return on dividends whereas Common Stock can never guarantee a return.
The Changing Prices of Stock and Buying Stocks
Stock prices change continually, and this is due to supply and demand. If a particular stock is popular and many people are attempting to buy it, the price of the stock will go up. If the stock is not so popular and the owners are selling it off, the prices will go down accordingly. It can be hard to understand what makes a particular stock popular or what makes people dislike a certain stock. One of the main factors in these popularity trends is news affecting the company in which you own stocks.
If news is positive, stocks are likely to go up. Unfortunately, the reverse is also true and if the company in which you are a shareholder is affected by negative publicity, the chances are the prices of stocks are going to be hit.
There are two main methods to buying stocks. The first and most common method is using a brokerage. A full-service brokerage manages your account for you and offers expert advice. They also usually come with a hefty price tag. Dividend Reinvestment Plans (DRIPs) are a lot cheaper, and basically allow you to purchase stock directly from a company. These kind of plans are a great way to invest little but often into a business.
Now you’re equipped with knowledge of some of the ins and outs of investing in stocks, you can begin your investment career with added confidence.