Entering the world of investment can be challenging for beginners, but it is one of the best ways to secure your financial future. One of the most popular ways to invest your money is through stock investment. Let’s talk about what stock investment is and how it can help you make your money grow.
What Is Stock Investment?
Stock investment refers to buying and selling shares in a corporation. When you buy a “share,” you are buying partial ownership in a company. The general concept is that you make money by selling shares for more than you paid to purchase them. Sounds great, right?
Why Do Companies Sell Stock?
Companies usually sell stock to pay for something they need for their company, such as a new product, marketing, or other services. Once a company decides to sell shares, an outside underwriter will determine the worth of each share based on the value of the business.
These outside underwriters are usually a financial institution or investment bank, such as JP Morgan or Goldman Sachs, who complete the paperwork to get a company’s shares on the stock market.
What is the Stock Market?
In the words of the SEC, the stock market is “where buyers and sellers meet to decide on the price” of shares in a company. Brokers usually act as a middleman between the buyers and sellers, so they will usually help you decide what to buy and sell on the stock market.
How Do I Make Money from Stocks?
We’ve told you that stock investment is a great way to make money, but how exactly can you earn money by buying and selling shares on the stock market? Let’s break it down.
Capital appreciation means that the stock has increased in value, allowing you to sell your shares for more than you spent to purchase them. The difference between what you paid for the stock and what you sell it for is money in your pocket (after you pay your broker, of course).
A dividend is money that a company regularly pays to all its shareholders. If you are interested in receiving regular income from your stocks, you want to purchase ones that will pay dividends.
Compound interest is the interest that you earn on interest. For example, if you make $10 in interest over the first year that you own a stock, the compound interest refers to the money you will earn on that $10 during the second year. The longer you keep your stocks, the more compound interest you will earn on those investments.
What are the Different Types of Stocks?
Stocks fall into two categories, preferred and common.
If you purchase common stock in a company, you will receive dividends (regular payments) and vote for significant company decisions over time.
If you purchase preferred stock, you give up your right to vote in a shareholder meeting, but you will get priority for getting paid. You get your dividends earlier and will get paid first if the company goes bankrupt.
Common and preferred stocks will also fall into one of the following categories:
- Growth: Value increases faster, but you will get fewer (if any) dividends
- Income: Pays dividends consistently
- Value: Cheaper than other stocks, may or may not appreciate
- Blue-chip: Shares in stable companies that are likely to appreciate
Advantages and Disadvantages to Stock Investment
Now that you understand the general concept behind stock investment, let’s determine if this is the correct type of investing to meet your financial needs. Generally, we recommend putting some of your assets into stocks, but not all of them, a process called “diversification.”
Advantages of Stock Investment
There is a reason why stock investment is such a popular option amongst investors. There are many advantages to investing your money in the stock market.
Potential for High Returns
Stocks have the potential to grow tremendously and make you a lot of money as an investor. While this is not guaranteed, over time, most stocks will increase in value over time.
Purchasing common stock in a company allows you to vote and influence decisions made within the company. Some investors buy stocks primarily to exercise this influence.
Disadvantages of Stock Investment
Although there are many great reasons to invest in stocks, there are also disadvantages to this type of investment that you should consider before getting started.
Stocks present a higher risk than most other types of investments because there is not much an investor can do to influence their value. They will fluctuate over time, and these fluctuations are outside of your control.
Risk of Company Bankruptcy
If the company goes bankrupt, you might not get paid for your shares. The first people that will receive money in this situation are the company’s bondholders, then the preferred stockholders, and then the common stockholders.
Frequently Asked Questions About Stock Investment
Still confused? Let’s answer a few more common questions about stocks:
How Do I Get Started with Stock Investment?
The first step to getting started with stock investment is to learn more about what type of stocks you should purchase. The easiest way to do this is by taking a stock investment course to understand more about stock investing.
After you finish your course, you can start investing independently or begin working with a broker to help you start purchasing shares.
What is a Broker?
A broker will help you buy and sell stocks to help you get the most out of investing in the stock market. They will charge you a fee for their service, usually as a commission on your purchases. You will need to decide which type of broker is best for you.
Discount brokerages will charge you fewer fees, but you will be responsible for more research behind which investments you choose. Alternatively, a full-service brokerage will charge higher prices but will complete that research for you.
What is the SEC?
The SEC, or the Securities and Exchange Commission, protects investors (you) by ensuring that everyone follows investment laws. The government regulates how investments are offered and sold, and the SEC enforces the regulations.
The Bottom Line
Stock investment is an excellent choice for investors but should only make up part of your investment profile. Before you get started, you will want to take a stock investment course to help you purchase stocks that fit your needs.