Investing in the stock market is a fantastic way for you to earn a profit and expand your wealth. However, the thought of risking your hard-earned cash is both intimidating to anyone who has never done it before. It doesn’t have to be. As with any investment, educating yourself in every aspect of the venture is the best way to get you started. In this guide, you will learn all you need to know about stocks, how you can earn from them, and everything in between.
What Are Stocks?
Stocks are equity investments that entitle you to part ownership of a corporation which means that you get part of that corporation’s earnings and assets. There are usually two types of stocks:
Common stocks, usually the type that most companies sell, give the shareholder voting rights on management issues but do not guarantee dividend payments. Dividend payments are distributions of profits given to the shareholders. Preferred stocks, on the other hand, are the opposite. While this type of stock does not provide the shareholder voting rights, it often guarantees dividend payments at agreed-upon intervals.
Preferred stocks are often favored by investors who want a lower-risk investment as opposed to common shares that attract those who don’t mind the higher risk. Choosing which one to purchase will depend on your risk-tolerance, financial goals and whether you want voting rights in the company.
How Do Stocks Work?
Perhaps the first question to tackle to answer this question is, Why do companies sell stocks anyway? The answer is simple: For one way or another, they need the money. To be able to cover the costs of starting or expanding a business, companies sometimes opt to go the equity financing (selling stocks) route. By selling stocks, they get access to funds with technically no interests to pay or even the requirement to pay it back. What they do provide in exchange is a portion of the profit and assets of the company.
It is noteworthy to consider that new companies usually offer what is called “growth stocks,” meaning that they reinvest all their profit back into the business. In this case, the investment only increases in value when the stock value consequently rises. How do stock prices rise? They rise when more people show interest in buying shares in the company. Only a few companies that are long-established would hand out annual dividend payments to their stockholders.
How Do You Invest In Stocks?
Let’s get down to the nitty gritty bit. Now that you have a basic idea about what stocks are and how you can make a profit from them, it’s time to learn how to make your first stock investment.
Choose your way of investing.
“I want someone else to manage my investments.” If you are someone who wants the perks of a passive income without dealing with any of the real stress that comes with stock investment, there are plenty of investment management firms that provide the perfect assistance while still keeping your financial goals in mind.
“I want to be hands-on with my investments.” You have at least some basic knowledge about the stock market and want to purchase and manage your stocks yourself. Read ahead, the steps below are for you.
Individual Stocks vs. Stock Mutual Funds.
There are two investment types available:
Individual Stocks. Interested in one particular company? Investing in an individual stock is considered very risky, especially for a beginner. But it could be a perfect way for you to test the waters. Some advantages of buying individual shares are that there are no ongoing fees after initial purchase and there is a greater potential reward. Keep in mind that although the rewards could be high, the losses may well as be devastating.
Stock Mutual Funds. Most beginners favor this type of investment. By employing professionals to oversee the operations, stock mutual funds offer diversified stocks and safer selections. This means that even if one share suffers a loss, your investment will not be affected as a whole. The reward potential might not be as high as purchasing individual stocks, but it’s a safer bet for your money.
Set your budget.
Once you know which type of investment to go for, it’s time to set a budget. How much does a stock cost? This depends entirely on how expensive the shares are. Prices range from a few dollars to a six-figure amount. If you are planning to invest through mutual funds, there may be a minimum requirement of $1000 or more.
Choose a broker.
It’s time to start playing. With a set budget in mind and some direction, the next step is to open a brokerage account. Choosing a broker is something that also needs careful consideration. You should evaluate them based on things like trading costs, commissions, investment selection, and investor tools and research. Another important aspect is if they match your investment style. Choosing the right broker will fulfill your needs as an investor and is essential in making sure your stock investment journey is as smooth as it can be.