If you get a bit nervous even hearing the term “investing in the stock market,” don’t worry, you’re not alone. The stock market tends to be something that intimidates new investors, but there’s no need to be unsure about your next investment move when working with Second Opinion Partners.
Here’s a quick beginner’s guide to everything you should know about stocks and the stock market.
What Are Stocks?
Let’s start in the beginning. Stocks represent ownership of a share of a company. Buying a stock is akin to buying a portion of the company, and as the value of the company fluctuates over time, so does the value of the stock you own.
For investors, buying stock is a great way to grow their wealth over time, and the stock market allows anyone, no matter your experience, to reap its benefits.
How Do Stocks Work?
Public companies sell their stock in a stock market exchange, and then investors can buy and sell these shares to investors. When you buy stocks, you are called a shareholder as you share in the company’s profits.
The stock exchange tracks the supply and demand of each stock, which affects its price. So if there is low demand, the price will be lower, and if there is a high demand for the stock, the price will be higher. Generally speaking, if the business is doing well, they have a higher price of stock, because the demand for their shares increases.
The supply and demand of the stock market change on a daily basis, which means your stocks will fluctuate in price.
How Can I Make Money With Stocks?
There are two main ways someone can earn money in the stock market; selling your stock at a higher price than what you bought it for, and through dividends. Let’s explain both.
Buying Low and Selling High
It’s important to understand that the stock market is a long game. Because the supply and demand of public company shares are ever-changing, it is almost impossible to predict your exact return on investment.
There may never be the “perfect” time to invest, so it’s best to get into the mindset of buying low and selling high. So keep a lookout for public companies that have lower-priced shares but high potential. Hold on to the stocks for some time, and then when their price increases, take advantage and sell. It may take quite some time – we’re talking years – before you see a price increase you are comfortable with.
Dividends are regular payments of a company’s profit to shareholders. They are paid out on a regular basis, and their overall share price can fluctuate like a regular stock share. However, not all stocks pay out dividends.
There are multiple types of dividends, including:
- Stock dividends – instead of paying out in cash, companies can pay out investors with additional stock shares,
- Cash dividends – companies will pay out a stock dividend in cash directly into a shareholder’s brokerage account,
- Dividend reinvestment programs – a type of program where the investor can reinvest any dividend received right back into the company’s stock,
- Special dividends – these represent a payout on all the shares of a company’s common stock but are not recurring like stock and cash payouts. Typically, special dividends happen when a company wants to distribute profits that have accumulated over several years.
Are There Different Types of Stock?
Yes, there are two types of stock; common and preferred. Here’s the difference.
These are your typical, run-of-the-mill stocks. Most shareholders have common stock, and some pay out dividends on a regular basis.
Preferred stock is also a share of a company, but they are appealing as they include added protection for investors. Those that hold preferred stock will be paid out first before the common shareholders, and if the company goes bankrupt, these owners have first priority during the liquidation of assets. Because of this advantage, preferred stocks are generally considered less risky than common stocks.
What is the Difference Between a Stock and a Bond?
Stocks represent ownership in a business, also known as equity. On the other hand, bonds represent money lent to a business from you. Both stocks and bonds can be publicly traded and both can generate a profit.
As mentioned before, an investor is able to benefit from stock once its share price becomes more expensive than what it was bought for. With bonds, there is no equity involved. Since the corporation is in debt to you when you loan them money, they will pay you interest on the loan for a set period of time. This means that if you maintain ownership of the bond, you’ll make interest on the loan while recouping the principal amount you paid.
While bonds can sound like a fantastic investment opportunity, it is important to know that like stocks, they are not completely risk-free. If the company you invest in goes bankrupt, they may not have enough capital to continue with interest payments and you may not get back your full investment.
Simply speaking, stocks are chosen as a long-term investment solution for those looking to increase their wealth over time. But stocks can be risky as you don’t always know what exactly your ROI will be when you choose to cash out.
With bonds, the investor will know exactly what they are getting into, as the terms of the interest payment will be clearly stated before the investment is due. Bonds are typically used as a source of fixed income over long periods of time.
How Can Second Opinion Partners Help Me?
At Second Opinion Partners, we offer holistic financial planning services that will help you achieve your “One Best Life.” Our team of financial professionals is here to offer the guidance and resources that you need to make the best financial decisions for yourself and your family.
We understand the ins and outs of the stock market and would love to share this knowledge with you. If you are looking to get started with your investment journey, give us a call today.