Many people are interested in owning stocks, but the main thing holding them back is the fact that they don’t feel they fully understand what they’re investing in. In reality, stocks are one of the simplest ways you can invest, even if you’re a beginner. Here are some basic things on how stocks work and where you can buy them.
What Are Stocks?
Essentially, a stock is a piece of a company. When you acquire stock, you claim ownerships on a company’s earnings and assets. How much stock you purchase translates to how much stake you have in the company. When you own stock, you are entitled to your share of the company’s earnings. If the stock includes them, you may also have voting rights. However, most individuals don’t have that type of capacity to influence company decisions. Instead, it’s the really big investors like institutional investors and billionaire entrepreneurs.
Remember that you have limited liability when you’re a stock owner. This basically just means that you aren’t personally liable if the company can’t pay back its debts. The most you can ever lose is the value of your investment, even if the company goes bankrupt.
Types Of Stocks
The two main types of stock are:
- Common Stock: This type of stock is basically partial ownership of a company as described in the section above. The dividends you get vary according to company profits. Common stocks have a higher risk than some other types of investments because if the company goes bankrupt, a common shareholder won’t get any money until all the creditors, bondholders and preferred shareholders get paid. This is the way in which the majority of stock is issued.
- Preferred Stock: Preferred shares are different in that they don’t always include voting rights and they usually guarantee shareholders a fixed dividend. In addition, preferred shareholders get paid off before common shareholders in the case of a company liquidating. Sometimes preferred stock is callable, which means the company can buy the shares back at any time.
In addition to these classifications, companies can also individually customize different classes of stock, such as labeling their stocks as Class A and Class B. This is typically done to affect how many votes a shareholder gets according to which class of stock they purchase.
How Stocks Work
When you own a stock, you may see the profits the company earns paid out in dividends. Of course, the larger your share, the more of those profits you’ll get. However, other stockholders only make money on appreciation of the stock in the open market.
When it comes to trading stocks, brokerage firms handle these purchases by coordinating with individuals who are on trading floors (think of the clips you’ve seen of workers on the floor of the New York Stock Exchange). The floor traders agree on a price for the exchange of stocks, then report back to the brokerage firm. This can also be done online through an “over-the-counter” market like Nasdaq. All this happens in response to someone wanting to buy a certain number of shares of a company.
While these trades are happening, the prices of stocks can go up and down depending on supply and demand. There are many factors which affect the supply and demand for a stock, including current news about the company and their earnings.
How To Buy Stocks
Stocks can be bought and traded through a brokerage firm or directly through a company. There are three main options when it comes to buying stocks:
- Face-to-face brokerage firms: This is when brokers work out of a brick-and-mortar location. Examples include Smith Barney and Charles Schwab.
- Online brokerage firms: This where brokers facilitate their work through an online website. Examples include E-Trade and Ameritrade.
- DRIPs and DIPs: Dividend reinvestment plans (DRIPs) and direct investment plans (DIPs) are the plan options that individual companies may use to allow shareholders to purchase stock directly from a company, usually at regular intervals.
There are pros and cons to each of these options. With online firm, you get the convenience of instant, unlimited access to your stocks. This is great for people who want control over their investments.
However, those who want more guidance and financial advice may want to visit a broker in person. The broker can provide a detailed financial analysis to help you determine which stocks are best for you. This is a great option for beginners or those with complicated financial assets. If you fall somewhere in between being an independent investor and a beginner, consider online trading sites which offer financial analysis and guidance as an optional feature.
Finally, there’s the option of DRIPs and DIPs. This is a good option for small investors who don’t want to lose any money by paying a broker but who are looking to build up investments over the long term.
Following Your Stocks
If you own stock, make sure you know the ticker symbol for the stocks you hold. The ticker symbol is simply a letter code which stands for a company’s name. For example, Microsoft’s ticker symbol is MSFT.
Once you know the ticker symbol you can look up your stocks in a financial paper or online. You’ll see the high and low stock valuations over the past year, the annual dividend payment per share, how many shares were traded that day (trading volume) and the high and low prices at which the stock was sold that day.
What many people are most interested, however, is the net change. This indicates the dollar value chance in the price of the stock from the close of the previous day to the close of the current day.
Buying stock does carry some risk, but overall it’s a great way to invest. In many cases, stocks outperform savings bonds and savings accounts when it comes to investing. Consider taking a chance on stocks to see if you can make more money off of your investments.