Idiots guide to stock investing

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You can buy stock directly using a brokerage account or one of the many available investment apps. What Are Stocks? Stocks are equity investments that represent legal ownership in a company. You become part owner of the company when you purchase shares. Corporations issue stock to raise money, and it comes in two variations: common or preferred. Common stock entitles the stockholder to a proportionate share of a company's profits or losses, while preferred stock comes with a predetermined dividend payment.

Note People generally mean common stocks when they talk about buying stocks. Investments accumulate over time and can yield a solid return due to compound interest, which allows your interest to begin earning interest. Benjamin Graham is known as the father of value investing, and he's preached that the real money in investing will have to be made—as most of it has been in the past—not by buying and selling, but from owning and holding securities, receiving interest and dividends, and benefiting from their long-term increase in value.

Why Stock Prices Fluctuate The stock market works like an auction. Buyers and sellers can be individuals, corporations, or governments. The price of a stock will go down when there are more sellers than buyers. The price will go up when there are more buyers than sellers. A company's performance doesn't directly influence its stock price. Investors' reactions to the performance decide how a stock price fluctuates.

More people will want to own the stock if a company is performing well, consequently driving up the price. The opposite is true when a company underperforms. Stock Market Capitalization A stock's market capitalization or "market cap" is the sum of the total shares outstanding, multiplied by the share price.

Market cap has more meaning than the share price , because it allows you to evaluate a company in the context of similarly sized companies in its industry. This is typically done on a two-to-one ratio. The number of shares changes, but the overall value of your holdings remains the same.

Stock splits sometimes occur when prices are increasing in a way that deters and disadvantages smaller investors. They can also keep the trading volume up by creating a larger buying pool. Note Expect to experience a stock split at some point if you invest in individual stocks. Stock Value vs. Price A company's stock price has nothing to do with its value. The relationship of price-to-earnings and net assets is what determines if a stock is overvalued or undervalued.

Companies can keep prices artificially high by never conducting a stock split, yet not have the underlying foundational support. Make no assumptions based on price alone. What Are Dividends? Dividends are usually cash payments that many companies send out to their shareholders.

Dividend investing refers to portfolios containing stocks that consistently issue dividend payments throughout the years. These stocks produce a reliable passive income stream that can be beneficial in retirement. You can't judge a stock by its dividend alone, however. Sometimes, companies increase dividends as a way to attract investors when the underlying company is in trouble. Note Ask yourself why management isn't reinvesting some of that money in the company for growth if a company is offering high dividends.

Blue-Chip Stocks Blue-chip stocks—which get their name from poker, where the most valuable chip color is blue—are well-known, well-established companies that have histories of paying out consistent dividends regardless of the economic conditions. Investors like them because they tend to grow dividend rates more quickly than the rate of inflation.

An owner increases income without having to buy another share. Blue-chip stocks aren't necessarily flashy, but they usually have solid balance sheets and steady returns. Preferred Stocks Preferred stocks are very different from the shares of the common stock most investors own. Holders of preferred stock are always the first to receive dividends, and they'll be the first shareholders to get paid in cases of bankruptcy.

The stock price doesn't fluctuate the way common stock does, however, so some gains can be missed on companies with hypergrowth. As we established earlier, a stock price rises due to growing demand for a stock. There are various reasons why there could be more demand for a stock: The business is doing well — This is based on hard and supportable facts.

So you buy the stock because you believe the company is fundamentally good and other investors will recognise that and they too will buy the stock. FOMO — ever bought something just because everyone is buying it?

Yup, the same thing happens for stocks too. Because a stock price is trending upwards, some investors may just buy in, hoping to ride the wave and make a quick buck. All of this feeds into the stock market and makes it grow. When stock prices are generally on the rise, economies are booming, there is positive investor sentiment — this indicates we are in a bull market. On the flip side, when we are in a recession, people are fearful hoarding cash , prices are falling — this is a bear market.

Where there is emotion, there is irrationality. When investors feel more confident, they often buy. When they feel fearful, they often sell. Because as humans we are generally risk averse. Just think of how moody one person can be in a day, now picture that x To invest or not to invest?

Do you have enough emergency fund stashed away? Are you willing to keep up with the news and study the business of companies? Do you need to use any of this cash within the near future? It helps us understand what we are investing in. Money is a tool, learn to use it well. Love it? Pin it!