Stocks, also known as equities, are representative of one's partial ownership in a company,
so if someone buys a stock for a given company, they partially own that company.
Stocks come in shares; the more shares bought, the more stock invested in the company.
Companies will issue stock to earn money (referred to as capital) and grow their businesses.
There's two main stocks: common and preffered stock. The main differences between the two is that preferred stockholders
are paid before common stockholders receive dividends, and that preferred stockholders don't typically have voting rights to
shareholders. Additionally, preferred shares have higher dividend yields than common stockholders would receive, and if a company
goes bankrupt, preferred stockholders have priority over liquidated assets.
The Stock Market
The stock market is essentially just a large network of stock exchanges
where traders and investors buy and sell shares of publicly traded companies.
Exchanges with private companies are done a bit differently in that these companies will
list stock shares through a process called initial public offering (IPO) where investors
purchase shares and the company earns money. Once the company is listed on any stock exchange,
it becomes a public company and investors can buy or sell the company's shares.
There's two markets involved: the primary and secondary market. The primary mrket is where
companies list their shares through IPOs, and the secondary market is the stock exchange, where
supply and demand of shares are bought, traded, and sold daily.
The world's largest stock exhange is the New York Stock Exchange (NYSE), located in
Lower Manhattan in New York City with billions of trades occuring daily.
How to Invest in Stock
The easiest way to start investing is using an online stockbroker. You can quickly purchase stocks on the broker's website
after creating and adding money your account.
Once an account is created, a good way to start is by researching companies you already know from being a consumer
and start researching their company for data like their annual reports – namely the management's message to shareholders. The letter will provide a broad overview of the company's
current situation and provide some context to the data. The majority of internet brokers also offer training sessions on how to utilize their products and even fundamental courses on stock selection.
Next is figuring out how many shares to buy and start very small. Purchasing a single share is a good way
to test the waters and see how the share manages and how you react to its placement in the market. You can always
buy more shares if you're more confident.
A good stategy is day trading, which takes advantage of small fluctuations in stock prices.
There's other more long-term trades or investments where buyers hold shares and play a waiting game
for a company's long-term growth earnings to rise.
Benefits and Risks
Some of the benefits to stock investments are:
Amassing great wealth: upon smart investments, and over long periods of time,
the stock market generally averages a gain of +10%, so if roughly $5,000 is invested annually
over an 8% growth rate, that $5,000 investment could turn into almost $250,000 within 20 years.
Simple way to make money: you don't need to be a business major or even have annually
knowledge regarding the ins and outs of the stock market. One lucky investment could be quite profittable
at little to no effort put in. You could spend throrough research about conducting smarter investments,
but anybody can make a stock exchange with even the smallest investments.
Staying ahead of inflation: investing can help grow assets and stay on top of inflation. Over time, inflation
averages close to +3% annually, while stocks generally make a 10% gain over a long period of time, whic allows
investors to avoid losing their purchasing power.
Accessing funds easily: stocks are primarily liquid; the markets are open almost every day
of the week and you can buy and sell at any time then if need be by turning shares into cash with minimal
transaction costs.
Some of the risks to stock investments are:
Losing everything: If a company performs poorly, investors will sell what they have, thus sending the stock prices
crashing, and when selling, you lose your initial investment, which could be difficult if you can't
afford to lose it. Aside from company performance, poor investments could result in substantial losses either from
buying investments you don't understand or trying to time to price changes.
Time: gaining wealth through stocks generally takes decades for a substantial return. While it's
possible to make a couple thousand dollars in stocks over a few years, you could be making hundreds of thousands
over the span of a few decades. It's important to find a good balance between how much time to put into a company
and how much return to settle for, otherwise you could miss out on massive gains, or spend too much time
only to come out with minimal earnings.
Stock market is volatile: The growth of the stock market is not linear in nature; there's fluctuations
daily, and plenty of crashes along the way with poor company performance. Additionally, you're going to lose money
even if you're a pro. When this occurs, it's may be hard to resist panic-selling all the shares and make smarter investments. You're not
going to need to sell when the market has just crashed.
