What Are Stocks?
The stock of a business or a corporation is the name given to a collection of shares belonging to individual entities. The shares are documentation that give the holder ownership over a predetermined percentage of the business. So in short, owning stock means owning a part of a business. Owning a stock makes you a shareholder in a particular company. These stocks entitle you to the proportional percentage of the company’s earnings, as well as any funds raised by liquidation after all debts are paid.
There are two types of stocks to be aware of. The first is a stock that pays dividends. This means that the company pays out to its shareholders, usually quarterly.
Not every stock pays dividends, though. While you may have stocks that don’t pay out, these are more conventional investments, meaning you’re buying the stock for a set price, waiting for that price to rise, and then selling the stock on for a profit.
There are different classes of stocks, as well. Some come with voting rights into the decisions taken by a company, while others forfeit those voting rights in exchange for higher dividend yield.
The annual percentage return on stocks is around 10%. At least, it is for the S&P 500, which is a collective of the 500 biggest companies in the US. However, that’s just an average for a safe investment strategy. You stand to gain a lot more by taking riskier investments, but you also stand to lose a lot more too.
How Stocks Work
There are two types of businesses that are relevant to us here. The first is a privately traded company. These are companies that trade stock privately, off of the stock markets. Chances are you’re not going to be able to buy into one of these.
The second is publicly traded companies. These list stocks on the stock market for people to buy and sell and is open to anyone and everyone.
When a company issues shares, what make up stocks, it means that a company is selling a percentage of itself, usually to try and raise funds. It then uses those funds to facilitate growth within the company, further increasing the value of its stocks. That’s because a company’s stock price is proportional to how much the company is valued at, so keep that in mind.
A company first offers its stocks on the public market with an initial public offering (IPO). It sells off a predetermined percentage of ownership and goes about its business. That means that the amount of stocks available for a company at any given time is finite, and it is more akin to trading than it is to purchasing. When you buy a stock, chances are you’re not actually buying it from the company. Instead, you’re buying from an investor who already owns that stock and wants to sell it. That’s why the price fluctuates with the performance of the company and the economy at large.
The exchange of stocks is facilitated by a stock exchange. Most investors access these exchanges by way of a stockbroker, who represents them on the exchange, connecting them to it and allowing them to trade through the broker’s platform, sometimes for a fee.
What Does Owning Stock Mean?
As we’ve covered, owning stock means owning a part of a company. What does that mean, though? Most investors own common stock. This is the, well, common type of stock that comes with voting rights and may pay dividends. There are other types of stocks, like preferred stocks, but these have to do with the liquidation of assets and all kinds of stuff you don’t want to be getting involved in just yet.
Owning this stock means you own a portion of the company’s profits or its losses. You don’t own a share of its assets, however. That means that you are not guaranteed to make money here. In fact, it’s far more likely that you’re going to lose it. Stock trading isn’t the magic little money bean many hope it is, but with the right preparation and knowledge, it very well can be.
How to Prepare for Buying Stocks
Research is key. There are two resources in this life that are worth more to you than money. One is time, and the other is knowledge. Both of those are only worth more than money because each can help you make more money.
You need to dive deep into investment strategy. There are countless books out there on stocks and the art of trading. Likewise, there are articles, studies, and memoirs galore that cover the topic, so you have no shortage of material to work from. You could even read some interviews of the greats, Warren Buffet, George Soros, and so on.
Research doesn’t just mean educating yourself on the processes of trading stocks, though. It also means researching about what stocks to buy and about those companies. Again, there’s no shortage of readily available online reading material here. Figure out if you’re trading to turn a profit on buying or selling or if you want stocks that pay dividends. Then see what other successful investors are saying about those types of stocks and which to look out for this year.
Once you have all your knowledge locked up inside that big brain of yours, you’re going to need the funds to invest in the first place. Stocks can have a low percentage ROI, so the more you invest, the greater the returns. Just don’t trade what you can’t afford to lose. Some brokers have a minimum amount you need to deposit to trade through them, while others don’t, but regardless, you should build up a small war chest before you start. Anywhere from $1,000 to $5,000 dollars should suffice, but you can also start out a lot smaller if you want.
How to Buy Stocks
The next step in this process is actually buying stocks. This is called building a portfolio.
We’ve already talked about how most investors buy stocks through a broker, and that’s exactly where you’re going to be going. The first step on your stock buying journey is actually opening an account with a broker of your choice, which means even more research. There are plenty of great brokers that are beginner-friendly and allow you to get set up free of charge, so find some reviews and take your pick. That pick, though, is again worthy of an article in and of itself, but there are a few quick things you should be looking out for.
The first is the commission fee. This fee is how much the broker charges you every time you buy or sell a stock. Many brokers offer no or incredibly low commission fees, and if you plan on being an active trader, then you’re going to want to focus on this metric.
The other thing to watch out for is the range of services and tools a broker offers you with membership. You want access to good customer service agents as a beginner, and you’re going to want your brokerage to come with investment resources, tools, and tips. So keep an eye on that stuff, too. After you’ve decided, follow the application process to get yourself set up.
The next step is something you’re already prepared for, and that’s selecting which stocks to buy. At this point you should have a good idea of where your money is going. If not, there is one way to simplify it all down, and that’s to just invest in companies you want to own.
Sounds obvious, right? After all, why would you invest in a company you don’t want to own part of? You should be investing because you like the company, its ethos, its mission, and its product, not because you want to make money off the stock.
Something we haven’t touched on yet is stock order types, which is the way in which you buy or sell a stock. Are you asking for a specific price for selling? Or are you willing to take the lowest bid to turn stock over quickly?
There are a few main types to be aware of. These are:
- Market orders: These indicate that you want to buy a stock or sell a stock at the best current market price. The order is fulfilled immediately, so there is no waiting around. Individual stock prices swing wildly throughout the day – literally every few seconds, so this type of order is best used for stocks with a low swing margin because you don’t have control over the specific amount you want for it.
- Limit orders: This type of order offers more control over the price than market orders. It’s sort of exactly what it says; you’re setting a limit for which to buy or sell a stock. Say, for instance, you want to buy a stock that’s worth $200, but you only think it’s worth $180. You could set a limit order that only executes when that stock is valued at $180. On the flip side, you can set a value that you want your stocks to sell at too. This allows you to do other things than staring at a stock price waiting for fluctuations, as it is an order that executes once the conditions have been met, regardless of your input.
There the two main order types, but there is a little terminology you should be familiar with:
- Bid: This is the amount that a person is willing to pay for a stock. Think of bidding at an auction; it’s the same principle.
- Ask: This is the opposite of a bid. It’s a seller’s asking price for a particular stock.
- Spread: This is the difference between the highest bid price and a stock’s lowest asking price.
There are other types, like a stop-loss order or a stop-limit order, and other conditions you can put on orders that determine how long it stays active for, but you don’t need to bother yourself with that for now.
So once you place your order, then what? If it’s a market order, then nothing at all; the trade should be instant. If it isn’t, then you may have to sit on your hands for a little while longer. Either way, at the end of it, you have ownership of your stock. What now?
If it’s a dividend stock, then nothing. Just sit back and wait for that quarterly payout to come around. Just know that the payout is usually a very small percentage of the original investment you’ve made.
If it isn’t a dividend stock, maybe keep an eye on the market to see when it jumps in value and sell it for a quick buck. Or you can hold onto the stock. Many investors like to buy stocks, and then just hold them for years, banking on a company’s success to grow the value of the stock. It’s a good strategy if you know what to invest in.
The last thing that you need to be aware of is that you’re going to want to diversify your portfolio. What does that mean? Well imagine this scenario: you invest all your trading money thousands of dollars over time, into this one stock. It’s going well, and the stock’s value is rising, so you’re holding off on selling. Then one day, there’s a news story. The CEO of this company has been found embezzling company funds, so the stock price drops, investors, pull out, the company needs to liquidate to pay off outstanding debt, and you’re left at the end of it with a big handful of nothing.
It might sound unlikely, but it has happened before, so invest in more than one stock. Buy a few from different companies that you want a part of. That way, you’re safe if one company goes belly up. You’re going to lose money because of it, but you aren’t going to lose all of your money.
There are things other than stocks you could consider investing in, as well, such as mutual funds. These are funds that you buy into that allow you to purchase stock for a group of companies all at once. It’s a great long term option, as the companies involved in a mutual fund are usually picked for a specific reason, so it allows you quick diversification, without all the extra research (which you should still be doing, regardless).
There’s also the likes of cryptocurrency, which is a whole world of its own. Gold and silver investments is a fairly safe way to invest your money away. The point is, having your money in different forms keeps you safe from any of the various economic disasters that could happen.