Stocks and the Stock Market
An Introduction to Stocks and the Stock Market
Wouldn't you love to be a business owner without ever having to show up at work? Imagine if you could sit back, watch your company grow, and collect the dividend checks as the money rolls in! This situation might sound like a pipe dream, but it's closer to reality than you might think.
As you've probably guessed, we're talking about owning stocks. This fabulous category of financial instruments is, without a doubt, one of the greatest tools ever invented for building wealth. Stocks are a part, if not the cornerstone, of nearly any investment portfolio. When you start on your road to financial freedom, you need to have a solid understanding of stocks and how they trade on the stock market.
Despite their popularity, however, most people don't fully understand stocks. Much is learned from conversations around the water cooler with others who also don't know what they're talking about. Chances are you've already heard people say things like, "Bob's cousin made a killing in XYZ company, and now he's got another hot tip..." or "Watch out with stocks--you can lose your shirt in a matter of days!" So much of this misinformation is based on a get-rich-quick mentality, which was especially prevalent during the amazing dotcom market in the late '90s. People thought that stocks were the magic answer to instant wealth with no risk. The ensuing dotcom crash proved that this is not the case. Stocks can (and do) create massive amounts of wealth, but they aren't without risks. The only solution to this is education. The key to protecting yourself in the stock market is to understand where you are putting your money.
The Definition of a Stock Plain and simple, stock is a share in the ownership of a company. Stock represents a claim on the company's assets and earnings. As you acquire more stock, your ownership stake in the company becomes greater. Whether you say shares, equity, or stock, it all means the same thing.
It must be emphasized that there are no guarantees when it comes to individual stocks. Some companies pay out dividends, but many others do not. And there is no obligation to pay out dividends even for those firms that have traditionally given them. Without dividends, an investor can make money on a stock only through its appreciation in the open market. On the downside, any stock may go bankrupt, in which case your investment is worth nothing.
There are two main types of stocks: common stock and preferred stock.
Common stock is, well, common. When people talk about stocks they are usually referring to this type. In fact, the majority of stock is issued is in this form. We basically went over features of common stock in the last section. Common shares represent ownership in a company and a claim (dividends) on a portion of profits. Investors get one vote per share to elect the board members, who oversee the major decisions made by management.
Preferred stock represents some degree of ownership in a company but usually doesn't come with the same voting rights. (This may vary depending on the company.) With preferred shares, investors are usually guaranteed a fixed dividend forever. This is different than common stock, which has variable dividends that are never guaranteed. Another advantage is that in the event of liquidation, preferred shareholders are paid off before the common shareholder (but still after debt holders). Preferred stock may also be callable, meaning that the company has the option to purchase the shares from shareholders at anytime for any reason (usually for a premium).
Investing in Stocks is not as hard as people take it to be, with a little help and useful resources, learning to invest in the stock market can be understood by just about anyone.
To start investing, the first thing you have to do is go out and find a stock broker. A stock broker is a person or company that does the actual buying and selling of your shares on the stock market. When you find a stock broker, the first thing you must do is open a trading account such as you would at a Bank. The difference is this account will not only hold your money but it will also hold other investments such as Stocks, bonds and mutual funds. When you buy shares of a company, money will be taken out of your account and changed over to company shares. When you're selling company shares the opposite will occur, your company shares will be changed over to money. Before this sounds confusing, you should know that there are two types of Stock Brokers: discount and full service brokers.
Full Service Stock Brokers:-
Full service brokers will give you advice and investment recommendations. But there is a price to pay for these recommendations, they do have quite high commission fees and are usually only suitable for investors who have a great deal of money to invest and who do few trades. If you're more into the excitement of Penny Stock investing which by the way is our specialty, then full service brokers will probably be too expensive for you, you might end up paying the broker most of your profits. You may be required to pay as much as $100 or more to have your full service broker buy you some shares, and just as much again when you sell.