When you hear the word “stocks,” what comes to mind? The Wolf of Wall Street? A crowded lobby with people pushing and shoving to raise their stock’s share price? Slick back hair and cologne?
These are all images that the media have shown us over the years about the stock market. It makes it seem like an everyday person can’t invest in capital.
But that simply isn’t true. More people are moving towards investing in stocks to have some extra money on the side. If you’re thinking about jumping into stocks, we’ll give you a breakdown of how to buy them and other information regarding investing.
What Are Stocks?
Before we begin, we’ll need to break down what stocks are. There’s no use investing in something that you don’t know about.
Stocks represent shares of a company that an individual owns. You’ll have a claim on some assets and earnings of the company. That means that as a shareholder, you will gain or lose money depending on how that company’s shares sell on the market throughout the trading day.
Different Types of Stock
Stocks are usually broken into two different categories, common and preferred.
As the name implies, common stock is what new investors choose to put capital into. It will help you test the waters of investing to see if it’s something you want to do.
Owning common stock gives you some of the companies shares and voting rights. Voting rights enable you to vote on company matters that will affect your stock ownership.
The more shares you have in a company, the greater impact your vote will have in shareholder meetings. The board members will then finalize a decision regarding a company’s policies.
Common stock ownership may also come with dividends, which is a payment that shareholders receive. However, it varies, and it’s not guaranteed.
If long-term growth is your goal, then investing in preferred stocks should be the investment of your choice. Preferred stocks give you some ownership of the company but without the same voting rights. Voting rights will depend on the company you buy shares in.
Preferred stock shareholders are paid a fixed dividend on their stocks as long as they have capital in a company. They’ll also be paid before common shareholders if the company goes bankrupt or decides to liquidate its shares.
Although preferred stocks are less volatile than common stocks, there’s less chance of capital growth.
Why Do Companies Issue Shares?
Every major business that we see today started as a smaller company with a big vision. To get their company to become a successful entity, they’ll need to raise capital.
Capital is essential for businesses because it helps with functions such as:
- Leasing office space
- Hiring employees
- Having a sales and distribution network
- Buying needed materials
There are two ways that entrepreneurs obtain capital for their business; selling shares and borrowing money.
When startups borrow money, they may struggle throughout the early days of operation because they’ll have few assets to secure a loan. It’ll also be tough to pay back the loan throughout the initial startup phase due to interest accrued from the loan.
That’s why most entrepreneurs choose to sell their company’s shares to gain capital. They’ll use personal savings and help from family and friends to start the business processes. As it grows, they’ll begin selling the business’s shares to gain the required capital needed for other functions.
Once the shares are listed on the stock exchange, the prices will fluctuate depending on how investors and traders view the company’s value. A standard metric used to determine the value of a company’s stocks is the PE (Price/Earnings) ratio.
How To Buy Stocks
With this basic overview of stocks, it’s time to talk about buying capital. Investing is a great way to put aside money. But to get long-term success, you need to do it correctly. To help you out, we’ll break down how you can start buying stocks.
1. Choose How you Want To Invest
Before you begin investing, a key component is figuring out how you want to invest in the stock market. Without direction, you may lose money because of carelessness. So it’s essential to define your investment goals. Here are some ways that new investors buy stocks.
Using online brokers is one way that investors choose to enter the stock market. It’s an inexpensive strategy because no formal advisors or planners are assisting you with investing.
Just create an account online, and you’ll be able to start trading right away. Depending on the broker, trading costs can be per transaction or share.
Remember that you’ll be on your own, so you’ll need to be confident in your ability to manage your investments. You can get help from some of the tools provided by online brokers. But to get accurate assistance, you’ll need to hire a full-service broker.
Full-service brokers are standard brokers who will sit down with you to talk about your investment goals. They’ll look at your finances, lifestyle, and other assets to determine the best way to gain equity.
But they aren’t limited to investment advice. Full-service brokers can also help you with retirement planning, tax advice, and other financial objectives you may have. That’s why they are called “full-service brokers”; you’ll get everything you need from them.
Full-service brokers are more expensive than online brokers. But having their advice can save you more money in the long run. Setting up an account with a full-service broker will usually be around $1,000.
After the stock market crash in 2008, Robo-advisors entered the world of investing. These advisors are beneficial to those who want to invest and let someone else take care of the rest.
Some Robo-advisors are entirely animated or will offer human assistance too. They’ll create a portfolio for you based on an algorithm that includes passive investment strategies. Robo-advisors also have low account maintenance fees, and initial account setup can be between $1 – $5.
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Investing in your employer’s 401(k) is a common choice for those who want to start investing. It’s a retirement account that you can contribute some of your payroll earnings to.
Using your employer’s 401(k) as an investment strategy can help you once you begin buying stocks in other securities.
It teaches beginners some foundations for investing, such as putting money aside, watching capital grow, and focusing on long-term gains.
2. Learn About Different Securities To Invest In
Depending on the route you choose, whether DIY or through a broker, it’s important to learn about the different securities you can invest in. Investors buy stocks in mutual funds or individual stocks.
Mutual funds allow you to buy multiple stocks in a single transaction. The pieces of stocks that you purchase may be small. But investing in mutual funds helps diversify your portfolio, which is essential to become a successful investor.
Investing in mutual funds will also lessen your risk of losing capital due to the diverse securities you have. If one stock in your portfolio has a bad day, the overall price of the fund won’t drop tremendously. So you can still get a significant return on your investment even with a loss.
If you’re trying to get shares in specific companies, then you can purchase individual shares in each. You’ll be able to build a solid portfolio, but it will take a lot of investment.
Another downside of investing in individual stocks is there’s more risk associated than with mutual funds.
Since all of your capital is in one company, if they have a terrible trading day, you could lose a good amount of money. On the other hand, if there’s a day of enormous growth, you could return big on your investment, but chances of this happening are rare.
3. Set a Budget
Budgeting is critical when trying to figure out how much money you can allocate towards an endeavor. The same is true when buying stocks. You’ll need to know how much money you’ll need to buy a stock and the amount you should invest.
The amount of money you’ll need to buy a stock will depend on its share price. They range between a few dollars to thousands of dollars.
Using mutual funds could be an excellent way for you to get many securities without breaking the bank. You could also use exchange-traded funds (ETFs), which are funds that trade like a stock and can diversify your portfolio cheaply. You can purchase some ETFs for lower than $100.
Once you decide on the type of stocks you want to buy, you’ll want to think about the amount you should invest. This is important because you’ll need to know which companies will give you the best investment opportunities without costing you much money.
4. Know Your Goals
Are you trying to earn a quick buck, or are you investing in long-term security? These are two essential questions that you should ask yourself as you begin your investing journey.
While you can earn life-changing money from buying a particular stock, most investors are in it for the long haul. Share prices will often fluctuate due to market volatility. That’s why as you begin trading, don’t check your on stocks frequently.
Allowing your investments to breathe can reduce fears of losing capital. However, if you check on them multiple times a day, you may jump to a hasty decision and pull your investment.
5. Maintain a Diverse Portfolio
As we’ve already stated, many successful investors have diverse portfolios. It enables them to have their hand in multiple securities, limiting potential losses. But sometimes, you may want to switch things up.
Depending on your situation, investment goals could change, or you may want to buy stocks in other industries. Whatever you decide, ensure that your portfolio is still diverse enough to meet your current investment goals.
Yes, checking your portfolio all the time won’t be beneficial, but you should check it when you feel like you want a change.
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The Average Market Return
We all want to make money from buying stocks. But one question remains: how much will you get for a return on your investment?
The average return has been at 10% for the last 100 years due to inflation. However, you’ll need to remember that the market is mainly suited to long-term investors.
Another thing you’ll want to take note of is that there are no guarantees on the market. This includes your return. There will be some good years of trading and some bad, but here are three tidbits to help you stay relaxed throughout the process.
- Remain calm throughout the good times
- There will be periods when the market is great, and you’ll be earning a lot of money
- It may be followed by a period of losses, so don’t invest more if you don’t have to
- Have an optimistic outlook
- Having a down market is a blessing in disguise
- You can buy attractive stocks at lower prices, which may lead to higher returns in the future
- If you want the average, buy and hold stocks
- Buy and hold stocks so you can get the average return on your investment
- Commission fees can create losses due to frequent buying and selling of shares
Now Your Ready To Buy Stocks
You now have all the necessary information needed to buy stocks. It can be daunting taking that step into the stock market. But make sure that you have a solid plan and do your research before investing in capital.
It will be a process of trial and error, but your persistence will pay off in the end.