Clever investing is important in order to achieve financial success and fulfill your goals. If you already have or you’re still working on an investing strategy, it most likely involves stocks in some form. A historical result is what makes investing in the stock market so popular. In the years 1930 – 2013 the average profit of the S&P 500 index was 9.7%. Even though it includes especially tough years and very good years, this average profit shows why it is good to own them.
Investing in the stock market may seem discouraging, but its not hard if you have learned the right consept and have correct practice. Even though there are many investing tools like investing funds and ETF’s that don’t require the investor to choose between stocks, it is still important to know what they are and how to make them work for your benefit.
What exactly are stocks?
Stocks are equity capital investments, that represent the ownership in a company. Other names for stock can also be shares or equities and it basically means that you are a shareholder in the company. When buying a companies stocks they come with certain rights, that may include for example getting dividends or the right to vote in meetings of shareholders.
Companies release stocks as a tool for collecting big funds. Those funds are then used to fund different projects that will later grow and bring profit to investors.
The price of a companies stock in the market, is simply to determine the companies value. That value depends on the current revenue and predictable profit of the company. Even though this process is a good way to expand the company quickly, it has it’s negatives. In addition to high taxes in the market, the companies have to show their financial statements, put up with certain regulations and face the shareholders pressure and constant surveillance.
Types of stocks
There are two main stock forms that can be bought widely: equity and preference shares. Equity offers you a piece of the company with a voting right. A company doesn’t have to pay dividends to regular shareholders. A dividend is a payment (in stocks, money or other assets) that a company pays to their shareholders from their earned profit.
Preference shares though work differently. Firstly, you most likely won’t be able to buy yourself a voting right. Instead of that it quarantees you more access to financial assets. When a company is paying out dividends, a preference shareholder has a priority. Equities are simply said more risky than preference shares. It is recommended to own a good blend of both equities and preference shares in your portfolio, depending on your investing strategy.
Even though these are the simplest stock forms, a company has possibility to customize different kind of forms as they wish. If there are more than one form of stocks, they are divided into class A and B. For example Warren Buffet’s Berkshire Hathaway offers both, class A (BRK.A) and class B (BRK.B) stocks.
How stocks work: 10 things to know before buying
- Learn the language: The stock market can be confusing if you haven’t learned the investing language first. Learn the meanings of buy and hold, investing and day trading, how to trade equity positions, market timing strategies etc.
- Learn the basic facts: Understanding the basics of a stock market is not a knowledge anyone is born with. Learning them is a important step if you want to start investing in them. Find an appropriate investing technique and training that enthuses you. And most importantly don’t ever think you have learned everything!
- Practice: Play stock market games, they will help you train without using real money and you will get a real experience without risking.
- Concentrate on a long-time perspective: Day trading can offer a suspense, but also causes stress and early losses for a new investor. Buy and hold strategy that was made famous by the legendary investor Warren Buffet, may be less intriguing, but gives a sure profit in a long run.
- Minimize the risk: Even though there are many techniques that affect your possibilites investing in stocks, this is one of the most important in order to better your profit. You can never fully lose risk but investing strategy creating courses will help you minimize risks.
- Use experts: There are lots of experts with years of experience that you can contact for help. Contact them on their social pages and find out what kind of strategies they use.
- Know your investor profile: For example, how much risk can you take. Even better – how big of a risk can you afford? It may be that equity capital is too risky for your portfolio. Or maybe stocks suit you but you need to keep away from ‘blue chip’ companies (widely known).
- Diversification is important: And also an important part of successful investing and a long-time profit. You can significantly lower your risk thanks to diversification, creating your portfolio with different stocks of varied companies, areas etc.
- Keep up with the news: Open up a newspapers financial part, subscribe to a newsletter or read a financial webpage. It doesn’t mean you have to keep an eye on the markets all of the time. It is rather important you have an overview of current micro- and macroeconomical events. If you know what is going on at that moment you have more success in creating your portfolio.
- Know when to hold: and when not to hold.
Investing in the stock markets is not a short outing but a journey. There’s always something to learn, strategies to discover and money to earn. Buying stocks is not gambling but an investment and it requires dedication and hard work in order to be really successful. Qualities like discipline, emotional control, consistency and concentration get better when you gain investing experience. But first and foremost you assure yourself a better financial standing if you are persistent.