The Dow Jones is up 0.47 percent this morning, and you probably have no idea what that means. You’re not the only one. Take it from comedian John Mulaney, who did a whole routine about it; the stock market is very hard to understand. But it doesn’t have to be.
Owning a stock is analogous to owning a percentage of a company. In other words, when that company does well, or its market value goes up, it is mutually beneficial for you as well. Here’s what to know before you start investing in stocks.
For many, stock investments can be appealing because it’s an example of working smarter, not harder. According to Investopedia, “there are many different ways to go about investing, including putting money into stocks, bonds, mutual bonds, ETFs, or real estate.” Think of stocks as a form of investment — these fields are largely represented by stocks, or corporations that you are able to buy a percentage of.
Stocks are not only for rich people — while it is true that wealthy people are able to buy more stock, they are not the only ones who are able to buy stocks.
In fact, it’s as simple as going to one of your banks and opening a brokerage account. This account will allow you to invest with your own money. For this kind of investing, people put their money in markets they believe have potential to grow in the next few years. Some people even go for the long-haul and invest with the knowledge that they won’t see returns on certain ventures until 10 or more years down the line.
If you were smart enough to be an early investor in a tech company, for instance, the return for when a company declares itself public (IPO) will be very high. For the stock market, be aware of the consistent see-sawing of value. Share prices change because of supply and demand. If demand goes higher than supply, the price will go up. If supply is greater than demand, the price will fall.
To actually buy stocks, a brokerage account is needed. A stock broker is used to help manage your funds. Charles Schwab or Smith Barney from Citigroup offer accounts that require a broker. The actual trade itself is done by the broker, who then gets a commission. If you prefer to manage your accounts online, consider Etrade or Ameritrade.
From there, you choose what types of stocks you want to buy. If the purchase is done online, there will be a lower commission fee. You also can buy stocks without a broker by buying directly from a company. DRIPInvestor.com gives a comprehensive list of companies that allow direct purchase of stocks.
After this is done, you can set limits to your account to decide the prices you’d like to buy at. This is to give buyers a choice as to whether to make a “market” or “limit” order.
The market price of the stock is used for a market order, while in a limit order, you can set the price at which you’d like to buy a stock yourself. If a stock is above or below the limit you set, the broker would not purchase the shares until the price meets your limit.
Types of stocks
There are several types of stocks to whet your interest. The most commonly used and talked about stock are common stock, hence the name. This is the form that the majority of stock is issued in. Due to the natural prospects of time, common stocks yield more return than corporate bonds.
Preferred stocks are similar to bonds. These shareholders do not hold voting rights even though they own shares of a company. The dividends on these stocks are significantly higher than for common stocks. Because of this, they are safer than common stocks. These shareholders get preferred treatment, as the name describes. These types of stocks can be “callable,” which means that a company can buy its stocks back.
Common and preferred stock are the two most common forms of stock, but they are not the only ones. Different share classes are given to majority owners. For instance, class A shares have more voting rights than class B shares, and may own a higher stake in the company.
While stocks may seem like a fun, yet risky investment to make, it is important to keep a few basic principles of money management in mind before you buy all of the stock of fidget spinners.
Don’t put all your eggs into one basket. It is very common for people to lose all their money in their brokerage accounts on stocks due to the nature of the fluctuating market. If you put all of your life savings into stocks, you may be heavily disappointed when things make a left turn and your wheel is broken. Now you’re broke, too.
For first-time investors, consider opening a brokerage account and speaking to financial advisors at a bank of your choosing. There are also a bevy of online resources at your disposal — try investopedia.com for starters.
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