A guide to stocks

While most people would stow away their hard-earned money in a traditional savings account, there are actually plenty of things you could do with it! One way to help your funds compound over time is through investing – usually in the stock market. While making investments may sound daunting if you have never done something like this before, it can actually allow you to find more opportunities in the long run. So, here’s a quick rundown of what you need to know about stocks before you jump into investing in them.

What are stocks

So, what are stocks? Stocks, otherwise known as equities, are assets that represent a fraction of ownership in a company. A unit of a stock is called a share. These assets allow their owners to gain a proportion of the company’s assets and earnings. Stocks are generally bought on stock exchanges or in the stock market. Corporations generally issue stocks in order to help raise funds so their business can operate or expand into new areas. Therefore, when the value of a company increases, and if the company continues to perform well, the shareholder’s stocks will increase too. This allows investors to take advantage of how the company is doing. That being said, it is not always so easy. Most investors will experience plenty of fluctuations when it comes to investing in the stock market. Overall, stocks make up the majority and are the foundation of many investors’ portfolios.

Different types of stocks

It is important to remember that not every single stock is built the same. In fact, most stocks tend to fall into one of two categories, the preferred and common stocks. While they have a lot of similarities to each other, there are also essential differences.

Preferred

Preferred stocks generally pay a fixed dividend to shareholders. This means that their shareholders have first priority in the event when a company goes bankrupt. They are also less impacted by market movements in comparison to common stocks. As such, preferred stocks tend to be the ones purchased as they offer less financial risk. On the flip side though, preferred stocks do not nearly appreciate as high as common stocks. This is because the value of preferred shares is inversely tied to interest rates. So, if the interest rate decreases, the value of the preferred stock will increase, and vice versa.

Common

On the other hand, common stocks represent a share of ownership in a business and offer stockholders voting rights in the company. This means they can vote on key business factors such as for instance, electing the board of directors. These stocks end to yield higher returns over a longer period of time when compared to preferred stocks. For example, if the business is doing really well, its common stock will increase. However, if the company performs poorly, the value can decrease too. In the event a company goes bankrupt, preferred stockholders will be prioritised to get pay-outs. If there are not enough funds left over, then common stockholders may not get anything, thereby losing out on their investment. Therefore, as they are considered a lot more volatile, common stocks are considered riskier than preferred stocks – though it has the potential to increase their investment value in the long term.

How do I buy stocks

If you are looking to start buying stocks, then the first thing you need to do is open an online brokerage account. This way, you can have access to the stock exchange. These types of accounts are generally offered by various investment firms. After you open an account, it is time to put funds in it and build up your portfolio.

Opening an account will require you to provide some personal and financial information about yourself. This can include your name, address, telephone/mobile number, Tax ID or Social Security Number, as well as any other identifying information. You may also be asked questions regarding your income, employment status, risk tolerance level, and investment goals.

Here are a few things you might want to keep in mind before opening an account with a brokerage firm:

• Fees: With every brokerage account, comes fees that a customer must pay. However, the kinds of fees you will be charged depend on the brokerage firm you are opening an account with. For instance, you can be charged fees for processing transactions, receiving account statements, account maintenance, or being inactive. Therefore, before signing up for an account, it is imperative you spend time reviewing their fee structures and comparing them with other brokerage firms, so you know which one is best suited to you.

• Investment style: Sometimes the type of account you need will be best determined by your investment style, such as if you are a more passive or active investor. Some brokerages may offer services in person, online or over the phone. Whereas other brokers can help you to maintain your portfolio, so you do not have to do it yourself. That being said, the most personalised request you need, the higher the cost. If you are looking for a cheaper but hands-off approach, then you may start looking for brokerages that offer robo-advisors to automatically manage your portfolio. If you are someone more active, then you may not care much if they provide this type of service.

• Account minimums: A few accounts are free for users to open, while others may require an initial minimum deposit to use. Therefore, potential investors should make sure to read the fine print and compare different accounts before committing to a particular brokerage firm.

After you have opened an account, it is time to start placing orders! Placing a stock order means that you are telling your brokerage which company you want to invest in, how many shares you would like to buy, and what price you are willing to pay. Some orders can be executed immediately, while others may take slightly longer. The time taken will depend on if you want the stock to hit a certain price before making a purchase.

Aside from using a broker, you can also buy stocks directly from a company. This is done through a direct stock plan (DSP). This will help to cut costs because you do not need to rely on a middleman. However, you may have to be employed at the company or already own stock in that company to be eligible for this option.