Stocks and shares have formed an integral part of financial portfolios through the ages, but what are stocks?
A stock is a type of security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings. Stocks are also known as equities and when you own stocks in a company, you are known as a shareholder.
There Are Two main types of stocks
There are two main types of stocks; which are known as ‘common’ stock and ‘preferred’ stock.
Common stock is what most people think of when they refer to stocks. Common stocks are those most often found in publicly listed companies, where the stocks are listed on a recognised exchange for trading. These stocks entitle the owner to vote at shareholder meetings and to receive dividends, but it does not guarantee these rights.
Preferred stock generally has preference over common stock in terms of dividends and voting rights, but it does not always have these rights. There are usually additional benefits to holding preferred stock over common stock, but there can also be caveats on holding periods if you acquire preferred stock prior to a company going public for example. Check the terms if this is the type of stock you are considering to ensure they match your needs.
What Benefits Do You Get When You Own Stocks
Owning stocks in a company does not mean that you own the whole company of course, but it does mean that you own a small piece of it, and as such, are able to have a voice and a vote on important issues.
Publicly traded companies are required to disclose their financial information to the public, whether they are shareholders or not, which gives investors some insight into the health of the company before they move to acquire a position.
Why buy stocks?
There are many reasons why people invest in stocks. Some people do so for the long-term, hoping to build equity in strong companies, potentially for retirement, or to draw an income from their dividend paying investments. Many others continue to invest for the short-term, looking to make quick profits, or take advantage of what they feel may be an undervalued company.
Some people invest in stocks because they believe in the company and its products or services, or that the sector the company is in is poised for growth. Whatever the reason behind it, owning stocks can be a risky proposition. The stock market can be volatile and stock prices can go up or down, and to the initiated, seemingly without warning.
What else should you know about stocks
If you’re thinking about investing in stocks, there are a few things you should know.
First things first, you will want to read as many stocks educational guides as you can, and build a holistic base of knowledge of all aspects of the various exchanges, and market dynamics.
At some point, you’ll need to open a brokerage account or a trading account with an online broker that offers access to the stock market you are interested in. You can open a brokerage account with a traditional broker such as Interactive Brokers or Fidelity, or with an online broker such as eToro, or Public. The services they offer are quite different, so it is worth taking a decent amount of time to compare the relative strengths of different stock platforms.
You will also want to know how to value stocks from a fundamental perspective, as well as understand some of the differences between trading stocks and investing. Some of the basics you will want to do for valuation purposes include reading financial statements and other company disclosures, as well as following the news about the company and the broader market. It’s also a good idea to develop an investing strategy and to stick to it.
Once you’ve learned all there is to know about stocks, done your research, and developed a strategy with a clear timeline in mind, you’re about ready to start considering investing in stocks. When you purchase stocks, you can either buy them outright or you can purchase them through a mutual fund or ETF.
Mutual funds and ETFs are investment vehicles that pool money from many investors and invest it in a diversified portfolio of securities. Buying stocks through a mutual fund can be a good way to diversify your portfolio and to reduce the risk of investing in individual stocks but there are fees attached. Don’t jump head first into either method before doing your due diligence.
When you buy stocks, understand that you’re taking on a certain amount of risk, but if you’re smart about it and you do your research, investing in stocks can be a great way to begin your financial portfolio.