What are stocks?
A stock represents a share of ownership in a company. Investors who purchase stocks are known as shareholders and can hold stock in the form of a certificate or in an account with a brokerage firm. A shareholder’s percentage of ownership of a company is proportional to the number of shares they own in relation to the total number of shares issued by a business. This percentage represents their share of risks taken and profits generated by the company. Your share of the earnings or losses will be proportionate to your percentage of ownership. Some stocks may include added perks, such as dividend payments in the form of cash or additional shares, capital gains payout, voting rights or other advantages.
Why invest in stock?
Stock offers investors the opportunity to grow wealth and the potential for higher returns than simply investing in cash alternatives such as bank accounts, CDs, money market accounts or Treasury bills. Stocks can help to prevent reduction in purchasing power as inflation rises. Stocks are typically long-term investments, included as part of a portfolio with the hope they will appreciate in value over time. Some investors, however, love the thrill of playing the market, engaging in more active stock trading, buying or selling the same issue within a few days or hours to take advantage of small, intra-day price changes.
Making money with stock
Investors make money with stock through dividend payments and capital gains from stock sales. Dividends represent the apportionment of corporate earnings to shareholders. The company’s board of directors chooses if they will provide dividends to shareholders. Dividends can be given in the form of cash, additional stock, or property and are often taxed at long-term capital gains rate, making them more attractive. Investors can also earn money through capital gains from stock sales. The goal is to purchase stock at a low price and sell it after the price increases. Stock prices can increase due to company profit, a favorable economy, rumors of takeover or increase in public interest. Capital gains from stock sales are taxed at a lower rate than ordinary income if held long-term. Of course, not all stocks increase in price, as a variety of factors ranging from poor earnings reports or bad management to lawsuits against a company can result in a stock losing value. In any given year, any capital loss you sustain can be used at tax time to offset capital gains.
Factors to consider before purchasing stock
Investing in stock is a personal decision which requires careful consideration. Before choosing to invest in stock or selecting which types of stock to add to your portfolio, there are a number of issues you should take into account. These include your:
- attitude towards risk
- return goals
- financial circumstances
- target holding period
- personal research or beliefs.
Types of stocks
There are many different types of stock, but stock can be divided into two general categories: common stock and preferred stock. These categories can then be broken down into voting stock and nonvoting stock. Stock can also be sorted into other categories, including size, growth profile, valuation, sensitivity to business cycles, country of business headquarters or trading history.
How to buy stock
The stock market refers to the organized trading of stocks through exchanges. In general, stocks are purchased through intermediaries called securities brokers and dealers, or stock brokers. You can purchase stock in various ways. Most stock trading occurs through stock exchanges. The New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX) are the two major U.S. exchanges. Nasdaq, an alternative to these two, allows sales and purchases over a broker-dealer computer network rather than on a trading floor. Stock brokers traditionally earn a commission based on the value of a transaction or the number of shares you purchase. Smaller company stocks which don’t meet the listing requirements of the NYSE or the AMEX or prefer a more centralized approach are listed through over-the-counter markets. You can also purchase stock through initial public offerings. An IPO occurs when a corporation goes public by selling shares of its stock to the public for the first time.
To learn more about how stocks can be incorporated as part of your portfolio, call us today.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Stock investing involves risk, including loss of capital.
The payment of dividends is not guaranteed. Companies may reduce or eliminate payment of dividends at any time.