Investing in the stock market can be a rewarding journey but many people aren’t sure where to start. Multiple investment options can make the process overwhelming. Stock investment can be a crucial part of achieving your financial goals or planning for your retirement, but if you’ve never bought stocks, you could feel a little lost. Fortunately, it isn’t as difficult as it sounds. Once you understand how the stock market works, you’ll feel confident to buy your first stock.
Here’s a beginner’s guide to help you get started on your investment journey.
What is a Stock?
A stock is a security that shows ownership in a publicly traded company. Companies issue shares of stock to raise money for business expansion or debt reduction. Once you own a stock, you become a part of the company and are entitled to a proportion of the company’s assets and earnings. The terms ‘stock’ and ‘shares’ are used interchangeably and both refer to the investment in a public company.
Each of the individual shares will represent the proportional investment in the public company. With more shares of the stock, you enjoy a larger stake in the company. Say, a company has issued 500,000 shares of the stock and you buy 50,000. This means you have a 10% claim on the company’s assets. The holder of the stock is called a shareholder.
While stock ownership gives shareholders a right to the company’s assets, it does not mean that individual investors can sell corporate property to pay off individual debt. There is a legal separation that protects the interests of both parties. Stock ownership can give shareholders the right to receive dividends, vote in shareholder meetings and sell the shares.
You can buy and sell stocks on public exchanges and brokerages. They have to conform to government regulations to protect investors. A broker is a company or an individual who is authorized to buy and sell stocks on your behalf. Individuals can open a brokerage account and start buying and selling stocks online. The process is similar to opening a bank account.
Types of Stocks
There are two types of stock – common and preferred. A common stock entitles the shareholder to vote at shareholder meetings and receive dividends whenever they are paid. On the other hand, preferred shareholders do not have voting rights, but they enjoy a higher claim on the earnings and assets as compared to common shareholders.
Preferred shareholders receive dividends before common shareholders are paid. They are also given priority when the company is liquidated or goes bankrupt.
Who Can Issue Shares?
A publicly traded company can issue shares, but it has to meet the U.S. Securities and Exchange Commission (SEC) regulations. They need to issue annual and quarterly financial statements to keep investors informed about the business. They also need to meet the revenue requirement, profitability history and legal requirements to be listed.
Companies issue their stock through a process known as an initial public offering or IPO and it is the company’s debut on the stock exchange. After it is on the market following the IPO, it can be easily bought and sold by investors.
Stock Market and Stock Exchanges
The stock market is a term used to describe the process of buying and selling shares of stock. The trade can take place in person or online through an exchange. The stock market is a regulated environment overseen by a government body and every exchange has its own set of guidelines and rules that all companies have to adhere to in order to list their shares on the exchange.
In the United States, the government bodies that oversee and regulate the stock market are the SEC and the Financial Industry Regulatory Authority (FINRA).
There are two major stock exchanges in the U.S. The New York Stock Exchange (NYSE) and National Association of Securities Dealers Automated Quotation System (Nasdaq), which is an American Electronic Exchange. Major public companies list their stock on one of these exchanges.
Stocks can be identified by their stock symbol, which is commonly known as a ticker. It is a set of characters issued to the public company so that it becomes easier to identify and trade the stock. No two companies have the same ticker. It is unique and you can see the stock exchange preceding the listing.
For example, the ticker for Tesla Inc. is TSLA and for Amazon is AMZN. You might see it listed as (NASDAQ: TSLA), which means Tesla is listed on the NASDAQ stock market. To look for a stock you are keen on buying, simply browse the stock directory of one of the exchanges.
Benefits of Stock Investment
Investing in stocks can come with several benefits, including:
High returns: Over the past 15 years, the stock market has generated an average return of 12.62% annually. This is why several retirement savings accounts are built with stock investments since the market generates steady returns in the long term.
Steady income: Passive income investors love the stock market for the steady income in the form of dividends. A dividend is the distribution of a part of the company’s profits to the shareholders. It could be monthly, quarterly or annual. Not all companies issue dividends, but there are a few companies that have a record of rewarding investors.
Keeps pace with inflation: The United States has seen about a 2% annual increase in inflation, but the savings account has an interest of less than 2%. Hence, leaving your money in the bank will not generate enough to outpace inflation. However, stock investments can do that for you.
Risks of Stock Investment
Despite the benefits, stock investment comes with a few risks.
Possibility of short-term losses: The market has generated an average return of over 10% annually in the past 15 years, but the returns in individual years will vary. There is also a chance you could lose money. When it comes to the stock market, there is no guarantee. If you engage in day trading or invest in penny stocks, you could take home losses.
Market volatility makes the investment risky: When you buy individual stocks, they are impacted by company performance, sector-specific risks and economic risks. No business is risk-free and when it comes to the stock market, volatility is always a part of the risk. Even major companies are not immune to bankruptcy and when you invest in individual stocks, the shares could carry an element of risk. If you do not want to take any company-specific risk, you might want to invest in an index fund or an exchange-traded fund.
Getting Started in the Stock Market
Investing in the stock market has been glamorized in the media, but the truth is that all investments come with a certain element of risk. There are different ways to invest in stocks at a relatively lower risk. Always research the company before you bet your money on it and have a long-term approach to investments. This will help build a strong portfolio that can sustain market volatility.
You can also have a robo-advisor handle investments for you based on your risk appetite and investment goals. If you find stock investment risky, you can choose to invest in a mutual fund or an exchange-traded fund. The fund will invest in hundreds of stocks, which will reduce company-specific risks.
Compare Online Stock Brokers
The first step to start your investment journey is to choose the right broker. The stockbroker will provide you with a platform where you can buy and sell stocks. Compare different brokers in terms of the services provided, fees, ease of use and choose the one that best fits your needs. Start your search with our recommended brokers listed below.
Frequently Asked Questions
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Stocks can make you money in two ways: dividends and capital appreciation. When companies distribute a part of their profit to investors, you earn in the form of dividends. They could be paid monthly, quarterly or annually. Additionally, as the company continues to make a profit, its business grows and the stock moves higher. This leads to capital appreciation, so when you sell the stock at a higher price than you purchased it, you generate capital gain. Say, you bought a share of Nvidia Corp (NASDAQ: NVDA) at $150 and sold it when it reached $200, you would have made $50.
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A stock gives ownership in the company, whereas a bond is a loan given to the company or the government. Stocks carry high risk, generate high returns, whereas bonds offer steady income in the form of interest and carry low risk.
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Stocks can make you a millionaire, but it cannot happen overnight. You need to pick the right stocks, reinvest dividends and have a steady, long-term approach. The path to becoming a millionaire is filled with patience.
