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Investing 101

Investing in Stocks

August 29, 2019


Who knows what the next day brings with it or how your life takes a turn any moment? Tragedies and mishaps take place all of a sudden. While you can’t escape from destiny, you can always prepare for the future. Financial stability is what helps you fight the odds and keep moving on in life. And for the matter, it’s better to invest in your future from the very beginning.

To “invest”  is to keep some asset, such as money, to work for the future to get a profitable return eventually. With so many investment options out there, deciding how and where to invest can be a daunting task. However, this should not stop you from investing.

Whether you are a beginner or a pro-investor, the stock market is one of the best places where you can invest your money.

What is a Stock?

Stock is essentially a form of security that allows the stockholder to own a part of a public corporation. The corporations sell the stocks to raise the company’s fund, thereby giving control to the stockholders. This is called the Initial Public Offering (IPO), and it gives you fractional ownership of the corporation’s assets and earnings.  Once you have got hold of the stocks, you can now resell your shares in the stock market.

The stock market refers to the collection of public markets where buying and selling of stocks, and issuance of shares of public corporations takes place.  The financial activities are either conducted through the institutionalized stock exchanges or over-the-counter (OTC) marketplaces operating under a fixed set of rules. A competent stock market is vital to economic growth as it enables the companies to access capital from the people.

While the stock market essentially deals with trading of stocks and equities, you may also trade other financial instruments, such as ETFs or Bonds.

Types of Stocks

Investing in stocks has always been a fascinating option for seasoned investors as well as beginners. The stocks fall into two main categories, i.e., the common stocks and the preferred stocks. Both types of stocks are investment tools; however, they are different from each other in some respects. Read along to find the difference between the two.

Common Stocks

A common stock owner is not only entitled to the profit the company earns but also enjoys voting rights. As a common shareholder, you have a say in the corporation’s affairs. You can exercise your control and vote in major decisions, like electing the board of directors, appointing auditors, in mergers, and takeovers.

Generally, if you have common shares, you get one vote on each share you own. However, some companies have dual or multiple stock structures with varying voting rights. For instance, investors with “A-Class” shares may get 10 votes per share, and the B-Class investors may only cast one vote per share.

Your stocks value is directly proportional to the company’s performance. If the company you have invested in does well, your stock value also increases and vice-versa.

Preferred Stocks

Preferred shareholders don’t have a voice in the corporation’s affair. They cannot vote in the election of Board of Directors, or any corporate policy, and other major decisions.

Preferred stock is very much similar to a bond as both ensure a fixed payment. Preferred stocks are a combination of common stocks and bonds. They have par values that rise and fall with the common stock prices of the company.

The interest rates affect the stocks’ par value. The rise in the interest rates result in a decline of the preferred stocks’ value, and vice-versa.  Since the dividend is guaranteed, most investors don’t sell out their stocks.

Preferred shareholders have the edge over the common shareowners in a liquidation process. Hence, a preferred stockholder has a greater claim to a dividend and the company’s assets and earnings. The common shareholders are entertained only after the bondholders, creditors, and preferred shareholders.

Pros & Cons of Investing in Stocks

Investing in stocks is a rewarding affair; however, it has some disadvantages. While the stock market benefits the investors with high ROIs, the market crashes sometimes. Hence, the investor is exposed to both profit and loss and risk and return.

Let’s have a look at the benefits the stock market offers.

Benefits

  • Buying the shares is as easy as you like. You may buy a company’s shares through a broker, online, or a financial manager.
  • All you have to do is set-up an investing account, and you are good to buy the stocks. You may open either a brokerage account or one assisted by a Robo-advisor.
  • If you’re a day trader or buy-and-hold investor, investing in stocks may enable you to outperform the market. Hence, you can earn profit by selling your share at a higher price.
  • You may invest in a company that pays a dividend. Capitalize the dividend you get against your stock in many ways. For instance,
    • The amount you receive as the dividend may make up for a drop in the share price.
    • You may buy more shares with the dividend; hence, it becomes the source of extra income.
  •   Stocks are easy to liquefy –turn into cash with minimal transaction costs. So, you can sell your stocks at any time of need.

The Risks

  • The biggest disadvantage is the crashing of the stock market. The dramatic rise and fall in the stock market is a potential threat for investors. A company’s poor performance may cause you to lose your entire investment.
  • Common shareholders are the last in the line when it comes to paying the investors. So, if the company goes broke, there are chances that a common stock owner may get nothing or a little amount.
  • Investing in stocks demands investment in time as well. Choosing the right company to invest in requires time-consuming research. Also, you have to keep track of the company’s development, and most importantly, the stock market trends.
  • An individual investor has a disadvantage as compared to professional traders or investors. Unlike the common investor, institutes have their hands-on trading tools, computer systems, and financial models.

Investment in Stocks – FAQs

What is the best way to predict price fluctuations?

It is best to narrow down the type of stocks in which you want to invest. After that, you can keep an eye on the news and updates about the asset you are interested in buying.

How do I start investing in stocks?

You have multiple ways to start investing in stocks. You can choose from hundreds of online brokers. Robo advisors can be a good option as well. Of course, you always have the option to invest directly by purchasing the shares from the company.

What is bullish or bearish market?

When the stock market goes down, you call it bearish because a bear attacks in a downward motion. On the other hand, a bullish market means the market is going up just like a bull’s upward attack motion.  

Bottom Line

Whether you are a pro-investor or thinking to take the first step, it’s important to do some homework. A well-thought-of plan can do wonders for you. On the other hand, a poor decision may cause serious financial damage. Learning to invest in stocks and how the market works is time taking. However, once you get familiar with the basics, your investing skills will improve with time.

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