Generally when one mentions investing, one thinks of stocks. Forming the foundation of more investment journeys, stocks or equities provide a tried and tested option for using capital to gain profits. In this article, we’re guiding you through the most important concepts you need to know when it comes to investing in the stock market, from what stocks are exactly to how to stock market basics.
What are stocks?
Also referred to as equity or shares, individual stocks are securities that provide fractional ownership in a company. Units of stock are called shares and entitle holders to "own" a small part of the issuing corporation. This can also entitle the owner to receive dividends from any profits the company might earn.
Other terms one might hear are exchange-traded funds (ETFs) which are stocks based on pooled investments that mimic the price of the underlying asset allocation while mutual funds are professionally managed investment funds. An investment portfolio can be made up of a collection of the above, or individual stocks, depending on your financial goals.
Stock market vs stock exchange
Stocks are traded on stock exchanges around the world and their price is driven by supply and demand. The term stock market refers to the entire industry while the term stock exchange refers to the platforms on which stocks are traded.
What is a stock exchange?
A stock exchange is an exchange platform where publicly-traded stocks can be purchased and sold through buyers and sellers, like the New York Stock Exchange for example. Initial Public Offerings (IPO's) are the primary mechanism of raising capital, where organizations sell shares to the general public in exchange for capital. This process allows the business to expand without incurring debt.
In exchange for being allowed to offer shares to the public, companies are obliged by law to publish financial information about the company's performance and grant shareholders a voice in how the business operates.
Advantages of investing in stocks
Before engaging in any stock market investing it is important to determine your risk tolerance. This pairs your current financial situation with the amount of risk you are willing to endure, anywhere from low risk to high risk. It's best to consult a financial planner should you be unsure.
Once this has been determined, you can build a strategy for your stock investments and partake in the many advantages that the stock market has on offer.
Profits
Should a company's share price increase, investors can make considerable profits by selling the shares at the right time.
Ownership
Shares provide investors with ownership in the company relative to the number of shares they own. As a shareholder, you gain access to a portion of the profits and may also receive voting rights within the business.
Dividends
Investors can earn passive income by receiving dividends from a company they have invested in when they pay out the profits made over a certain time period. Some companies offer quarterly dividends while others are annual.
Income and growth
Stocks deliver an ideal investment opportunity that can provide both income and growth. Investors looking for a more risk-averse investment and stronger financial stability will benefit from engaging in the stock market.
Experts can leverage your earnings
Skilled fund managers understand mutual funds inside and out, gaining skills that allow them to optimize investments to capitalize on market fluctuations. Constantly monitoring equity funds for opportunities to better position clients' portfolios, these experts continually revise their strategies as needed.
Disadvantages of investing in stocks
Requires time
If you are new to the industry and intend to invest on your own, you will need to undergo a considerable amount of research on each company before investing in it. You will also need to learn how to read financial statements and annual reports and keep an eye on the news when determining whether a company might be profitable in the near future.
No guarantees
While considered one of the "safer" investment options, individual stocks can still be high risk as there is no guarantee of what might happen to a company on a year-to-year basis or that you won't lose money. Always determine your risk tolerance before investing in the stock market.
Fluctuating prices
All markets are subject to volatility and the stock market is no exception. Be sure not to fall into the trap of making trading decisions based on emotion and stick to the golden rule: buy low, sell high.
How to invest in the stock market
Ready to start investing in the stock market? The process is probably simpler than you thought it would be.
- Find a brokerage account most suitable for your investment goals
Consider your short and long-term goals and determine which account is best suited to you, from college savings accounts to an individual retirement account to everything in between. - Find a brokerage company
Next, you'll want to find a brokerage company. Consider their available investment options, reputation, and fees when looking for the right fit. If you're looking to invest in stock mutual funds, individual stocks, or index funds, be sure that the brokerage account (or brokerage firm) provides the relevant services. - Deposit funds
Once you've opened your account you will need to deposit money to get started. This is generally in the form of a lump sum, however, monthly recurring payments can also be set up. - Determine which investments you want to open
After opening an account you can begin to purchase and sell stocks, as well as bonds, stock mutual funds or general mutual funds, index funds, and ETFs that are composed of hundreds of securities. Whether investing in various individual stocks or the investment options listed above, consider using a diversified, risk-friendly approach whereby you don't put all your eggs in one basket. - Confirm your investments by purchasing them
Once you've decided what to purchase, simply enter the ticker symbol in the buy field and specify how many shares you would like to acquire. And that's how you enter the stock market world.
Final thoughts
By their very nature, stock market investing can be volatile with numerous internal and external factors outside of the control of retail investors affecting stock prices. While exchange-traded funds and mutual funds might diversify this risk, it's best to assume that you are still susceptible to it.
During times of extreme price fluctuations within the stock market don't make emotional decisions and instead maintain patience. Consider writing down your goals beforehand and referring to this in times of market turbulence. Having a diversified portfolio of individual stocks will help mitigate risk.
It's critical to understand your risk tolerance before investing in the stock market and make sure you get investment advice from an expert so that you can determine the best course of action for yourself. By analyzing your personal financial situation, they are able to advise you on the best route for your financial goals, from whether it's best to invest in individual stocks or index funds before you start investing.
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