A Guide to Understanding Stocks
What is a Stock? When you purchase a stock you own a portion of a publicly traded company. Owning a share of stock make you a shareholder. For example, if you own one share of stock in Bank of America, then you own (although a small portion) a share of the company. As a shareholder, you are entitled to receive a portion of the company’s profits. This guide to understanding stocks will highlight the most important aspects of this type of investment.
Companies issue shares of their stock as a means of raising money to further grow their business. The New York Stock Exchange (NYSE) or Nasdaq is where stocks are purchased and sold (traded). Publicly traded companies issue millions of shares of stock. Purchasing stock is a form of investing.
Understanding Stocks – Stocks as an Investment
- You make money from a stock in two ways.
- You buy a share of stock for one price and if the company is doing well financially the stock price goes up. For example, you purchase shares of Ford Motor Company for $10.00 after a year the stock price goes up to $15.00. The value of the Ford stock you own has gone up by 50% you made $5.00. (i.e. the stock has appreciated in value)
- Dividends are a means of how a company rewards its shareholders for ownership of their stock. Dividends are paid out quarterly. The dividend payment represents a share of the profits the company has made.
- The gain or loss of the stock you own and the dividend you receive are the primary drivers for determining the rate of return on your stock investment.
- The “ticker” symbol is used to identify a company stock trading on an exchange like the Nasdaq or the New York Stock Exchange. The ticker symbol identifies a specific company. For example, the ticker symbol for Walmart is WMT, and for Ford it’s F.
How to Purchase Stocks
- Stocks can be purchased through a variety of brokerage firms. Larger banks like Bank of America or Wells Fargo have their own brokerage company where you can purchase stocks directly from them. Discount brokerage firms like Etrade, TD Ameritrade or TradeKing sell stocks online directly to investors.
- There is a fee for buying and selling shares of stock through a brokerage firm, rates vary but typically range from $4.95 to $7.95 per trade.
- Stocks are typically considered a risky short-term investment because the value of a stock can fluctuate daily based on the company’s performance, market conditions, political events or even world events.
- Unlike savings accounts, CD’s, and Money Market accounts that are federally insured (FDIC) – stock investments are not.
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When are Stocks a Good Investment?
Stocks are generally considered a long-term investment. To minimize risk most investors diversify their stock portfolio with companies that operate in multiple business sectors. For example, owning stocks in the technology industry and the oil industry at the same time.
If you’re considering an investment in stocks that saying “don’t put all your eggs in one basket” definitely applies. Starting with a small investment is a good way to learn about stocks and the stock market. And whether you can handle the volatility of this type of investment.
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Do you invest in stocks? What’s your strategy? Comment below.