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A Beginner's Guide to Investing in Stocks

Sebencapital

Published
03/01/24
A Beginner's Guide to Investing in Stocks Buying Shares, Dividend

Investing in stocks can help you grow wealth steadily. Learning how to invest smartly and stay patient over time can bring bigger returns, even if you start with a small income. In 2021, many people in the Forbes 400 richest Americans got there because they owned a lot of shares in a company.

It begins by knowing how the stock market functions, what you want from your investments, and if you're comfortable taking risks, whether it's a lot or a little.

Key Takeaways

  • Stocks mean you legally own part of a company; buying shares makes you a co-owner of that company.
  • You make money from stocks when their prices go up and/or when you get dividend payments.
  • Dividends are commonly cash payments that many companies distribute to their shareholders.
  • You can purchase stocks directly through a brokerage account or various investment apps available.

What Are Stocks?


Stocks are investments that show you own part of a company. When you buy shares, you become a part owner of that company.

Companies release stocks to collect money. There are two types: common and preferred. Common stocks give you a share of the company's profits or losses. Preferred stocks promise a fixed dividend payment.

Note

Most often, when people discuss buying stocks, they're referring to common stocks.

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Investing in Stocks

Owning stocks can make you money when their prices go up or when you get regular payments called dividends. Over time, your investments can grow a lot because of compound interest, where your earnings start making more earnings.

Imagine you put $1,000 in and add $100 each month for 20 years. If you get a 10% return annually, you could end up with $75,457.50, even if you only put in $25,000 total.

Benjamin Graham, called the father of value investing, said the best way to make money in investing is by owning and keeping stocks for a long time. This includes getting interest, dividends, and seeing the value of your investments grow over the years.

Why Stock Prices Fluctuate

The stock market is like an auction where people—like individuals, companies, or governments—buy and sell stocks. When there are more sellers than buyers, the stock price drops. If there are more buyers than sellers, the price goes up.

A company's success doesn't directly change its stock price. It's how investors react to the company's performance that affects the stock price. When a company does well, more people want to own its stock, so the price goes up. But if the company isn't doing well, fewer people want the stock, and the price drops.

Stock Market Capitalization

A stock's market capitalization, known as "market cap," is the total number of shares multiplied by their price. For instance, a company with one million shares, each priced at $50, would have a market cap of $50 million.

Market cap matters more than just the share price because it helps compare a company to others in its industry. It's not fair to compare a small company worth $500 million to a big one valued at $10 billion. Companies are usually sorted by their market cap sizes.

  • Small-cap: Companies valued between $300 million to $2 billion.
  • Mid-cap: Companies valued from $2 billion to $10 billion.
  • Large-cap: Companies valued at $10 billion or above.

Stock Splits

A stock split happens when a company increases its total shares by dividing the ones it already has. Usually, this is done at a ratio like two shares for each existing one.

For instance, if you have 100 shares of a stock priced at $80 per share, after a stock split, you'd own 200 shares priced at $40 each. The number of shares changes, but the total value of what you own stays the same.

Stock splits can occur when stock prices rise a lot, making it hard for smaller investors. They also help keep trading active by attracting more buyers.

Note

If you invest in individual stocks, it's likely you'll encounter a stock split at some stage.

Stock Value vs. Price

A company's stock price doesn't indicate its actual value. A $50 stock might be worth more than an $800 stock because the share price alone doesn't tell the whole story.

What matters is the connection between the price-to-earnings ratio and the net assets, which decides if a stock is too expensive or a good deal. Some companies can keep their stock prices high without actually having strong support from their fundamentals. So, don't judge a stock only by its price.

What Are Dividends?

Dividends are cash payments that lots of companies give to their shareholders. Dividend investing means having stocks that regularly pay dividends over time. These stocks create a dependable income source, useful for retirement.

But don't rely only on a stock's dividend. Some companies raise dividends to get more investors, even when the company itself isn't doing well.

Note

Consider why a company isn't using some of its money for growth within the company if it's giving out high dividends.

Blue-Chip Stocks

Blue-chip stocks are famous and come from poker, where the most valued chip color is blue. These stocks belong to strong, long-standing companies that regularly pay dividends, no matter the economy.

People prefer them because they often raise dividends faster than the rising prices of goods and services. This means you can earn more money without buying more shares. Blue-chip stocks might not be showy, but they usually have stable finances and steady profits.

Preferred Stocks

Preferred stocks are unlike the regular stocks that most investors have. People who own preferred stock always get dividends first and are paid first if a company goes bankrupt. But the price of this stock doesn't change much like regular stock, so you might not catch big gains, especially from fast-growing companies.

Also, those who own preferred stocks don't get to vote in company elections.

Finding Stocks for Your Portfolio

You can find investment ideas from various sources. Consider using services like Standard & Poor's (S&P) or other online places that offer info about new and promising companies if you want professional advice. If surfing investment websites isn't your thing, look around you.

Observe what people are buying or talking about. Pay attention to trends and companies that might benefit you. When you're at the store, notice what's becoming popular. Ask your family about products or services they like and why. These simple steps can help you spot potential investment opportunities.

Note

You can discover chances to invest in stocks in various industries, such as technology or healthcare.

It's vital to spread out your investments. Think about investing in stocks from various companies in different industries or different-sized companies. A well-spread portfolio may include other types of investments like bonds, ETFs, or commodities.

How To Buy Stocks

You can purchase stocks directly using a brokerage account or through various investment apps. These apps allow you to buy, sell, and keep your stocks on your computer or smartphone. The main differences between them usually involve fees and available tools.

Both older brokerage firms like Fidelity and TD Ameritrade, and newer apps like Robinhood and Webull, sometimes offer free trades. This makes it simpler to buy stocks without being concerned about commissions reducing your future earnings.

Note

You have the option to join an investment club instead of investing alone. It offers more knowledge at a fair cost, but it involves spending time with other members who might have different levels of expertise. Sometimes, you might need to combine some of your money into a shared club account before making investments.

Use Your Retirement Account

You can invest in stocks through your retirement account, like a 401(k) or 403(b) offered by your employer as part of your benefits. These accounts help save for retirement, but your investment options are often restricted to the selections given by your employer and the plan provider.

Note

If your employer doesn't provide a retirement plan, you can set up an IRA (Individual Retirement Account) by yourself with a bank or brokerage firm.

Choosing a Stockbroker

There are two kinds of stockbrokers: full-service and discount.

  • Full-service brokers give personalized advice and charge higher fees, service charges, and commissions. Many investors accept these higher costs because of the research and resources these companies offer.
  • With discount brokers, investors handle most of the research work. The broker mainly offers a trading platform and customer support as required.

Beginner investors can utilize the tools and guidance offered by full-service brokers, while active traders and experienced investors who conduct their own research may prefer commission-free platforms.

Another option is hiring a money manager. These professionals handle the stock selection and purchase on your behalf, but they typically charge a substantial fee—usually a percentage of your overall investment. This arrangement requires less time since you might only need to meet with them once or twice a year if the manager performs well.

Note

The U.S. Securities and Exchange Commission (SEC) provides useful guidance on how to research your investment professional before entrusting them to handle your money and investments.

Managing investments with lower fees may require more personal time and effort. Opting for higher fees may be necessary for seeking market outperformance or when extensive advice and support are required.

Selling Stocks

Knowing when to sell stocks is crucial in investing. While some investors follow the trend of buying during market rises and selling during falls, a wise investor focuses on a strategy aligned with their financial goals.

Monitoring major market indices is essential. The three primary U.S. indices include:

  • The Dow Jones Industrial Average is a stock market index.
  • The S&P
  • The Nasdaq

Stay calm during market corrections or crashes. Though unsettling, these downturns are often temporary, and historical trends indicate that the market tends to recover. While experiencing losses isn't enjoyable, it's advisable to endure the challenges of a declining market and retain your investments, as they are likely to regain value over time.

The Bottom Line

Mastering stock investment might require some time, but it's a great way to grow your wealth. Explore different investment sites, try different brokers and stock-trading apps, and spread out your investments to lower risk. Remember your comfort with risk and your financial goals as you learn, and soon enough, you'll become a proud shareholder.

Frequently Asked Questions (FAQs)

What are penny stocks?

Penny stocks, or microcap stocks, are inexpensive shares in small companies. However, these stocks can be very unstable and hard to sell once you buy them, according to the SEC. It's crucial to be extra careful when considering investing in penny stocks.

What is volume in stocks?

Volume indicates how many shares are traded within a specific timeframe, often representing what's traded in a day. If a stock's trading volume grows, it's usually viewed as a positive signal indicating strength.

How many stocks should you own?

There isn't a precise number of stocks that fits every investor, but experts often suggest owning between 10 to 30 stocks. The general idea is to have a diverse enough portfolio to prevent significant losses without overextending your investments. The best number of stocks for you is the one that meets this balance.

Written by Sauravsingh

Techpreneur and adept trader, Sauravsingh Tomar seamlessly blends the worlds of technology and finance. With rich experience in Forex and Stock markets, he's not only a trading maven but also a pioneer in innovative digital solutions. Beyond charts and code, Sauravsingh is a passionate mentor, guiding many towards financial and technological success. In his downtime, he's often found exploring new places or immersed in a compelling read.

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