Stocks: A beginner's basics
In basic terms, stocks give you an opportunity to own a piece of a company. When you buy a company's stock, you essentially claim a share of the company's assets and earnings; you become a shareholder. Just like with any other investments, you should exercise patience and plan for the long term when you invest in stocks.
Why investors buy stock
Here are the reasons why investors buy stocks. They buy stocks in order to create wealth, achieve financial stability and independence, plan for retirement, vacation, or education. In addition, stock investments offer the highest potential for building wealth in the long haul, compared to mutual funds, exchange traded funds or index funds.
How to purchase stocks
You can use a broker (Fidelity, E-trade, TD Ameritrade, etc.), a direct stock plan from the company without a stock broker, etc. Here are the steps you need to take to buy stocks: 1) open a brokerage account; 2) fund your account; 3) decide how many shares you want to buy; 4) choose your order type; 5) execute the order, sit back and celebrate.
Benefits and risks of stocks
As an investor, owning stocks comes with risks and benefits. If the stock price goes down, you will lose money and vice versa. There is no certainty that a company whose stock you hold will prosper or do well. You can minimize risks by buying a few shares or stocks across different sectors. Many factors affect a company's stock price, including but not limited to quarterly earning reports, regulatory, political, economic and other events.
How you make money from stocks
Here's how you make money from stocks. First, you make money when the stock price goes up. You also make money by earning dividends. Dividends are a portion of the company's profits or earnings that it pays to shareholders for simply owning the stock. Dividends are usually paid to shareholders quarterly. Not all companies pay dividends. Always adopt a long-term investment approach. Here's a nice overview of how investors earn money from stocks. Check out a nice comparison between stocks, ETFs and index funds.