A stock is a security that embodies the ownership of a portion of a corporation. Buying a stock from a company makes you a part owner of such companies. Stocks can also be called shares. Companies offer their stocks for public purchases by listing them on the stock exchange of the country they are operating in.
A stock market, equity market or share market is the sum total of buyers and sellers of stocks which represent ownership claims on businesses.
Benefits Of Investing In Stocks
A) Stocks have the capability to be a good investment portfolio. When you buy stocks, you build your savings. Through time, people have discovered that long term stocks profits is better than most cash investments. People believe that such long term investments have better tendencies to build profits over a period of time.
B) Stocks protect your wealth from taxes and Inflation. Long term investments in stocks can give you better tax treatment and protect your money against inflation.
C) Stocks can also help you maximize your investments through the dividends they pay. It can also act as regular income depending on the type of stock.
Types Of Stock
1) Common stock
As the name implies, this is the commonest type of stock available. It is the basic type of stock. Common stock confers on its holders, the right to vote on pertinent issues that affect the company and they also vote on the board members. They get dividends, but the frequency of the payout is not assured.
But on the downside, the shareholders are the last to be paid if the company folds up.
2) Preferred stock
This type of stock also offers the same advantages as the common stock. This stock pays its holders guaranteed dividends as opposed to common stock. The shareholders receive compensation if the company goes bankrupt. However, the holders cannot vote on any issue that concerns the company.
3) Large cap stocks
Stocks can be categorized by market capitalization. This is usually done by multiplying the total number of the company’s shares by its current stock price to measure its value.
4) Growth stocks
This refers to companies that are growing their shares, profits or revenue at a speedy rate than the market in general. The advantage is that you may see stronger price appreciation on the long run.
Growth stocks are more volatile because the company is taking risks to grow at such rates. Companies that are growing tend to plough back profits and therefore may not pay out dividends.
5) Value stocks
This refers to the shares of companies that are put up for sale. In this type of stock, the investors tend to seek them out from the market as they are always underpriced by the stock market.
6) International stocks
As the name implies, this means stocks or shares from businesses and companies that are not resident in your home country. Investing in these stocks has the capability to grow your portfolio especially if they are operating in a fast growing economy.
Others include IPO stocks, Blue chip stocks, Dividend stocks etc.
Features Of A Good Stock
1) Increasing profit
You should consider the profitability of the company over a period of time. Aside the speculations and arguments in favour of the stock do not ignore the fundamental indicators.
Past records of the company should be taken into consideration before investing. Companies that do not record profit consistently should not be invested on. Your aim is to make profits and so, you should invest with a company that makes profits consistently.
2) Low leverage
As an investor, you need to pay attention to debt profile of a company before investing. If their debt profile is too high, they will suffer losses if something goes wrong in the economy.
3) The Quality Of The Product
If a company has a good quality novel product, they have the possibility to do well. Innovation is the bedrock of many businesses and therefore, if the company has an innovative product to offer, their stocks rise in value. And there may not be need to borrow money to operate efficiently.
4) The management team of the company:
A good and efficient management team is crucial to the growth of the business. Management team is responsible for the growth and smooth running of a business and so any bad management policies or actions negatively affect the company and the investors too.
Pay attention to the management team of the company you wish to buy their stocks. Look at their personal track record and measure their success rate. You can check them out on LinkedIn to know more about their work history. Look at their performance over time and decide if they are good enough.
Things To Consider Before Buying a Stock
1) Price
2) Revenue growth
3) Market capitalization
4) Analyst report
5) The industry
6) Earnings per share
7) Dividend
Personal Considerations To Make Before Investing In Stocks
1) Financial goals
Before investing in stocks, you must be sure of your personal financial goals. What do you intend to achieve with such investments. Is it your retirement plan? Is it an inheritance for your kids? Is it a form of savings for a project? Knowing these end goals will guide your investment strategy.
Furthermore, knowledge of your goals will determine how much of your funds you are willing to invest.
2) Risk tolerance /threshold
Investments are accomplished by risks. Before investing, know about your personal threshold for pain. This is because your investment may not go exactly as you want. Seeing your stock value falling can be a painful experience.
However, you need patience to wait for the market to rebound. And sometimes, the market may not recover and you will carry your losses. If you do not have the mind to take such huge risks, then you should probably find other alternative businesses to invest on.
3) Your Current Investment Profile.
Even as a serial investor, you need to look at your current portfolio before buying more stocks. Diversification is good, but carry out due diligence before taking on more risks.
4) Time
As an investor, you must know the time frame that you expect your investment to last for. If you intend to save up for a major project, you need to know how long you have before your deadline. You need to know whether you are investing for a long-term or a short-term basis.
For example, you are investing for your retirement at age 70, or you are investing for your children who are still toddlers, you already know that you are investing long-term. But if you need to save up for a building project, you are looking for a short-term investment.
How To Purchase Stocks
The easiest means to buy stock is through an qualified online stock broker. To buy stocks, you will need to have a brokerage account. A brokerage account is a special investment account used strictly for buying and selling of securities such as stocks, mutual funds and bonds. See Best Broker
You can set up a brokerage account with licensed brokerage firms. You can transfer money into and out of the account like in every other bank account, but the difference is that brokerage accounts give you the access to the stock market.
You own the money and investments in your brokerage account and you can sell off your stocks at any time you wish to. The broker is simply a middle man between you and the stocks you to purchase.
There is no limit to the number of brokerage accounts that you can have. After opening and funding your account, you can now buy stocks through the broker’s website.
On the other hand, you can also use a full service stockbroker or buy directly from the company.
In this case, you should be looking for companies that offer direct stock options. With this, you can buy shares directly from the company.
Again, you can buy stocks without broker through a dividend reinvestment plan which allows you to automatically plough back dividends into the stock.
Step By Step Process Of Buying Stocks
1) Select an online broker
As said earlier, the easiest way to buy a stock is through an online stock broker. Select a good online broker. Ensure that you carry out a thorough review of their terms and conditions and services they offer before choosing them.
2) Decide the stocks you want to purchase.
This step is important as you do not want to get carried away by fancy words and complicated data. Bear in mind that you are looking for a quality company to invest your money on and also become a part owner of such company.
Before choosing the stock, look into the company’s annual reports. This will open your eyes to what is happening in the company. Secondly, search for the company on the broker’s website.
In particular, look at their security and exchange commission filing, quarterly earnings updates and other general news concerning the company.
3) Decide on the number of shares you want to buy
As a beginner, it is advised that you start with paper trading to get yourself acquainted with the business. Paper trading is a good way for people to learn and understand how to buy and sell stocks without using real money.
Paper trading is a demo kind of trading where people do not use their cash to trade especially when they are new in the business to avoid losses. Using paper trading, people acquire experience and expertise that will help them navigate through the stock market.
However, when you start trading with real money, it is still advisable to start with small amounts of money until you get used to the business.
4) Choose Your Stock Order Type
There are basic stock trading terms you should know about. They comprises but not limited to these below;
A) Ask: This is the price that the sellers are willing to accept for the stock.
B) Bid: This is the price that buyers are willing to pay for the stock.
C) Spread: This is the difference between the highest bid price and the lowest ask price.
D) Market order: A request to buy or sell a stock at the best available price.
E) Limit order This is a request to buy or sell a stock only at a specific price.
F) Stop loss order: In this case, once a stock reaches a certain price, the stop level market order is executed. Knowing these terms are key to ensure a successful transition into the stock market.
5) Optimize your portfolio
As you become acquainted with the stock market, you can now expand your investment. You can now buy more and more stock and securities for short term or long term basis.
When Is The Best Time To Sell Your Stocks
You are free to sell your stocks at any time, but it is not advisable to sell during the fall in value. The value of your stocks may rise and also fall as a result of the activities going on in the market, so you are advised to wait until the stocks have risen in value before you sell them. If you sell when the value is falling, you will lose your funds.
Investment in stocks or securities has been proven to be an effective way to make your money work for you. People invest in stocks as a form of retirement plan. Others buy shares for their children. But whatever your reasons are, investing in quality stock is always a good initiative. PRising stocks is the joy of every investor.
Recently, companies like Twitter, Netflix, MTN has been making waves owing to their growing profits and dividends they pay to their investors. Buying stocks no matter how small makes you a part owner of such companies.
However, before you start buying stocks, be sure to invest responsibly. Do not put all your eggs in one basket. Carry out due diligence. Do not invest what you are not willing to lose.
Take calculated risks only and ensure that you are investing in companies that have comparative advantage over their business counterparts. Always look for companies that have potential for development.
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