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Stock Investing Basics – A Brief Overview To Stock Investments

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Introduction

 

 

 

Learning about investing is a lot like learning to ride a bike. At first, it may look intimidating and complicated, dangers seems to be everywhere. That’s why it’s important to learn the basics and ways you can help minimize risk to protect yourself. After a good amount of practice and learning, you can take the training wheels off and really start riding

Along the way, the roads may change. There will be good days and bad days and while learning to ride doesn’t guarantee you a spot in the Tour de France, riding a bike could get you where you want to go a little faster.

In this lesson, we will be explaining stock investing basics that is required for all future investors looking to engage actively in the stock market.

 

But before we begin, we would like you to read and agree to the Terms & Conditions of this post before you proceed any further.

Disclaimer: Invest In Wall Street is in no way financially or legally responsible for any investing decisions made by any of our readers and are, in turn, acting on their own free will. The information in this article is purely educational and should not be abused or misconstrued in any way, shape, or form.

 

Stocks 101

 

Let’s start with the basics and look at one of the most common investments, stocks.

A stock represents partial ownership of a company. When you purchase a stock, you’re buying a piece or a share of a company. By owning a share, you own a small fraction of the company’s assets and have a claim on it’s future earnings.

There are two ways you can make money by investing in stock. The first is through stock appreciation, this is when a stock you own goes up in value. If an investor bought the stock at one price and the price went up, the investor could then make money by selling the stock to another investor at a higher price.

 

 

The second way is through a dividend. This is a periodic payment issued by some stocks. A dividend is a way for a company to give a portion of its earnings to shareholders.

 

 

Here’s an example of how stocks work. Suppose there is a company called Bull Flag Cycling. This company makes bikes – really good bikes. The bikes are so good, if fact, the company wants to expand so it can sell more bikes to people all around the world.

To do this, the company needs to raise money, also known as capital. There are a few ways this company could do this. For starters, it can take out a loan, but that would mean taking on a significant amount of debt – or it could issue shares of stock.

By issuing stock, which is called “going public”, the company can raise money without going into debt. Instead, it sells shares of ownership and a claim on future earnings to investors.

 

 

So let’s meet a typical investor. Our investor is someone who has a little extra cash. They are looking for an investment that has the potential to offer better returns than a savings account, and they are willing to accept
higher risks of investing in a stock.

They think that Bull Flag Cycling is a promising company that’s likely to grow. Because of this, they think buying a share would be a good investment.

So how much does a share cost? Suppose the company decides to raise $1 million and it’s decided to issue 1,000 shares of stocks. Because each share represents a fraction of the company’s worth and there are 1,000 shares, each
share represents 1/1000 of Bull Flag Cycling.

And because the company is raising $1 million at the initial public offering or IPO, each share would be initially valued at $1000. Let’s suppose the price doesn’t change after the IPO – so our investor purchases a single share on the open market through his online stock broker for $1000.

Now let’s see what could happen to this investment. If the company does well and profits increase, the value of the company is likely to go up. As a result, the stock price may increase as well. Assuming the price of the stock does go up, our investor could now turn a profit by selling their shares to another investor in the stock market.

However, if the company’s ventures don’t go as planned, it’s value could decrease, and so could the stock price. If this happens, our investor could lose money if they decide to sell at the current price.

When it comes to investing in the stock market, the basic goal is to buy when prices are low and sell when prices are high.

 

 

But stocks in the stock market don’t always go up. Sometimes they stay the same and sometimes they go down – and sometimes, prices change quickly. Because of this, stocks are considered riskier than other historically safer investments such as bonds or CDs.

However, investors keep coming back to the stock market. Why? Because with this increased risk comes the potential for greater returns.

Savvy investors take precautions to try to minimize risk, like creating an investing plan, adding diversity to their portfolios by investing in a variety of companies, putting money in other investments besides stocks, and learning trading strategies for up, down, and sideways markets (Note: one strategy is not enough if you want to invest and
especially if you are interested in day trading. The best investors in the world are able to adapt to the constant changes in the stock, generally implementing a sound strategy that works if a market is bullish, bearish, or sideways).

 

 

Now that you know some of the basics about investing in stocks but that’s just the beginning. You can learn more with our investing education here at Invest In Wall Street.

 

Quick Recap

In Review….

Stocks

  • A stock represents partial ownership of a company. When you purchase a stock, you’re buying a piece or a share of a company. By owning a share, you own a small fraction of the company’s assets and have a claim on its future earnings
  • There are two ways you can make money by investing in stock…..
  1. Stock Appreciation – This is when a stock you own goes up in value. If an investor bought the stock at one price and the price went up, the investor could then make money by selling the stock to another investor at a higher price
  2. Dividends – This is a periodic payment issued by some stocks. A dividend is a way for a company to give a portion of its earnings to shareholders
  • Companies can raise capital by issuing shares of stock to help their business expand
  • By issuing stock, which is called “going public”, the company can raise money without going into debt. Instead, it sells shares of ownership and a claim on future earnings to investors
  • When it comes to investing in the stock market, the basic goal is to buy when prices are low and sell when prices are high
  • But stocks in the stock market don’t always go up. Sometimes they stay the same and sometimes they go down – and sometimes, prices change quickly. Because of this, stocks are considered riskier than other historically safer investments such as bonds or CDs
  • Savvy investors take precautions to try to minimize risk, like creating an investing plan, adding diversity to their portfolios by investing in a variety of companies, putting money in other investments besides stocks, and learning trading strategies for up, down, and sideways markets

 

 

And this will lay the base for your stock education moving forward. This was a thorough examination of what stocks are and how they work – along with ways you can potentially profit from them financially.

Companies raise capital through issuing stock as an alternative to taking out a business loan and amassing a great amount of debt. They can use the capital generated to build up their business into a full scale corporation, pay off any existing debt or business fees, or even decide to pay back their shareholders every quarter in the form of a dividend – although it should be noted that not all companies issue a dividend and dividend payments can be halted by the company if they see fit.

You as the investor, can benefit from a stock investment through stock appreciation (if the financial performance increases by the end of the quarter) and through quarterly dividends (although some pay monthly dividends – but for the most part, quarterly, or every three months).

I hope you have enjoyed this post and found the information to be quite useful. If you have any questions or concerns, please feel free to leave them down in the comment thread below and make sure to like and share this post.

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