Jan 20, 2025
Basics
A stock is the ownership of a tiny fraction of a company. As part-owner, the investor is entitled to a portion of the company’s profits and assets, commensurate with the amount of shares they hold.
The value of stocks can fluctuate based on the company’s performance, market conditions, and investor sentiment.
Stocks are a pillar of many investment portfolios. They are risky, but the flip side is higher potential for making significant money over time.
Potential for high returns
Ownership of an asset
Dividend income
Liquidity
Companies can raise prices as an inflation hedge, often leading to higher profits
Portfolio diversification, leading to reduced risk.
Market volatility can lead to losses
Company-specific risks
Unlike bonds, stocks do not guarantee returns or dividend payouts
Economic sensitivity
Emotional decision making can lead to losses
Brokerage fees
Common stocks | The vast majority of stocks out there. Common stockholders vote and receive dividends. |
Preferred stocks | Fixed dividends, but no voting rights. Higher priority in case of liquidation. |
Growth stocks | Stock of fast-growing companies that are pushing hard to expand and are less likely to pay dividends as their goal is reinvesting in capital appreciation. |
Value stocks | Stocks of companies perceived as being worth more than their current price and expected to increase in value. |
Dividend stocks | Investors who rely on their investments to provide a steady income often like stocks of companies that regularly pay dividends. |
Blue-chip stocks | Shares of well-established companies with a history of financial stability and reliable performance. |
Penny stocks | Cheap stocks (usually under $5/share). High potential returns, but low liquidity and high volatility. |
Sector stocks | Sometimes, stocks are categorized according to the sector they belong to, such as tech, healthcare, finance, or consumer goods. |
Issuing stock is a strategic decision that helps companies support their growth initiatives, manage financial structures, and reward stakeholders.
Here are some key reasons a company may issue stock:
To fund expansion
If you need capital to develop a new product, or expand operations in some other way, and don’t want to go into debt, you can sell shares of your company.
To improve cash flow
A company may need to re-enliven its day-to-day operations or pay off existing liabilities, and the influx of cash is just what the doctor ordered.To attract investors
Investors are not just money bags, they also represent networks of valuable connections and reservoirs of expertise.
To incentivize employees
Including stock options to employees is a cunning double-pronged strategy: it aligns employees’ interests with those of the shareholders, and serves to attract and retain talent.
To reduce debt
Companies can use the money that comes in from sale of shares to pay down loans or other obligations to reduce financial leverage and advantageously shift their capital structure.
To provide liquidity
Early investors and founders can monetize part of their investment and still retain ownership if stock is issued.
Getting started with stocks can seem daunting, but a structured approach will help you navigate the process effectively. Here are the steps to begin investing in stocks:
There are many places where you can seek knowledge on fundamental concepts: books, online courses, and financial news websites are a good start.
Follow financial news and market trends and get comfortable with how everything works through observation.
Determine your investment objectives, risk tolerance, and time horizon. Are you investing for retirement, a major purchase, or growing wealth? Knowing your goals will help shape your investment strategy.
Look at various brokers’ fees, the services they offer, and how easy they are to use. Online brokers tend to offer lower fees and greater flexibility.
Provide the required information to apply.
Link your bank account to deposit funds into your brokerage account. Many brokers allow electronic transfers for quick funding.
Decide whether to invest in individual stocks, exchange-traded funds (ETFs), or mutual funds. Diversifying your investments can help manage risk.
Consider strategies such as value investing, growth investing, or dollar-cost averaging.
Use the brokerage platform’s research tools to analyze stocks. Look at financial statements, performance metrics, and market trends.
When you’re ready, execute a buy order for the stocks you’re interested in. Start with a market order for immediate execution or a limit order to specify your purchase price.
For your first time, invest only a little bit of the capital you have on hand. This will allow you to gain some real-world experience without too much risk.
Be aware of your portfolio’s performance, and about market conditions. Be flexible and willing to adjust your strategy, but don’t act impulsively.
If you don’t feel totally comfortable managing your own investments, a financial advisor can provide personalized guidance.