Stock Primer for the Novice Investor
When it comes to investing money, the very first thing that comes to mind is putting it aside as savings. What people fail to realize is that this is not a productive way to invest their money. Instead of making their money grow, they end up having the same amount as what they started out with.
If this sounds common to you, it may be because you are making a mistake in investing your hard earned money. In fact, you do not get anything because you are not risking something. As a result, you are not actually investing—you are just saving your money away.
What is Investing?
Investing is largely synonymous with risk. Apart from investing money, there are other things you put at risk too. One example for this is your future. If you apply for a certain company, you are risking your future by staying with them. You are unsure how long that job will last. But because you decided to go for it, you are able to see it grow. When you’re getting to know a woman, you are also investing in the relationship.
While it’s at the stage where you’re still getting to know her, you are asking information about her. You are risking your time and (more importantly) your feelings to someone who you have never met before. Again, you’re unsure where this will lead you off to. You can either end up marrying her or breaking up after a few months, you’ll never know unless you take the risk.
The same thing happens when you invest your money. When you invest money, you are putting it into something with the intention of seeing it grow. You are never guaranteed that this decision will give you a fruitful result.
However, if you do your research and decide on this carefully, you will get to see a positive outcome from this venture. Such as in the case of investing your money in the stock market—you never know how this will turn out to be. This is why it is important that you get information on what this type of investment is all about.
What are Stocks?
Before you decide to invest your money in the stock market, it is best that you know what you are in for. You can do this by getting a thorough understanding on what a stock is. To make things easier to understand, stocks are portions of a company which you can buy.
It is also referred to as a share, since you are an owner of a certain percentage of the company you invested in. Despite owning a portion of the company, you do not get a say on how it should be run. The only ones who get to do this are those who have put a lot of money as an investment in the company.
Two Types of Shares
If you have decided to invest in the stock market, it is important to know about the two types of shares available—common and preferred shares. When you choose common shares, you have a bigger chance of losing a portion or all of your investment should that company stop operating.
This is because the bond holders, creditors and preferred share holders get a higher rank than you. As such, they are entitled to receive some money when the company closes before you do. In addition to this, preferred share holders have a higher dividend compared to common share holders.
How to Purchase Stocks
Once you have an idea of how the stock market works, the next thing you need to do is to learn how you can purchase stocks. This normally happens through two general options—through a brokerage or without one. The biggest difference between the two is who gets to handle the stock.
If you choose a brokerage, you will be paying for the expertise of a broker. Meanwhile, the other option lets you buy or sell shares directly with the company. This means you do not have to pay for a broker to assist you anymore.
There are actually six different ways you can buy stocks. Under the assistance of a broker, you can choose to get full service, online brokerage, or discount brokerage. If you opt to handle things without a brokerage, you can choose from a Direct Stock Purchase Plan, Dividend Reinvestment Plan, or a Buying Share (via a specialized service).
Choosing which option you would like to use depends on how versed you are with the stock market. If you prefer to do things your own way, then you should invest without brokerage. Otherwise, getting the help of an expert through a brokerage may be best. This is particularly true if you have zero knowledge on the stock market.