Stocks 101: Learn How to Invest in Stocks
2019-08-30 | Simpler Trading Team
Each day people hear or read something in the news about the stock market and many of those people want to learn more about how to invest in stocks.
When you ask, “What are stocks?” the answer is fairly simple.
Stocks are a small claim of ownership in a company sold by the business owners and purchased by investors.
Stocks provide an investment opportunity that people can buy or sell with money they’ve earned or saved. People invest in stocks believing the investment will rise in value and increase their financial position.
Once you understand the basics of how to buy stocks in the stock market you can concentrate on the important goal of growing your finances.
Stocks are considered a more risky investment compared to real estate, bank certificates of deposit (CDs), or bonds. With this increased risk comes the potential for greater and possibly faster financial return. But the goal is to keep your stock investing simple and minimize risk.
Keep in mind a stock is simply a purchase of a small part of a company. A stock is an investment that maintains a “share” of ownership or equity in the company. This partial ownership provides potential for profit from the success of a company while also exposing the investor to financial risks if the company falters.
Stocks as a profitable investment strategy have been increasing the wealth of investors for generations. Let’s take a look at the foundation of how to trade stocks and how the stock market can help investors increase their financial standing.
Basics of Stocks Explained
What is a stock?
A stock is a type of financial equity or security. Stocks, bonds, futures all fall under the same terms of equities or securities, so don’t get confused there.
Stocks were once “issued” or printed on pieces of paper that looked like an award certificate. They almost always are now held electronically by a stock brokerage or investment company.
Stocks are a launching point to provide working capital for companies and investment opportunities for investors.
Each stock, or share, gives the investor, or shareholder, certain claims toward company assets and earnings. Along with partial ownership, shareholders have certain voting rights at corporate meetings and can share in company profits that include capital gains and dividends.
A single stock is simply ownership of a small piece of the corporation’s financial pie.
As an example, anyone who owns 10,000 shares of a company with 100,000 shares outstanding is said to own a 10% stake in the company. By comparison, most publicly-traded companies on a stock exchange will have millions or even billions of shares outstanding.
The goal of investing in stocks is for all involved to make money - the company and investors.
Every company wants to make a profit. To be profitable, companies need capital - cash - to conduct new business through increasing manufacturing, hiring additional workers, expanding sales, researching new products and services, or upgrading equipment.
Instead of going to a bank or other lender that would create debt, companies can issue stock to get the needed capital.
The first time a company issues stock is called an initial public offering (IPO). This changes the company from a private operation to a publicly traded company. The more profitable the company becomes, the more attractive it is to ongoing investors.
Companies seek cash to expand operations and earn more profit while investors want to use their cash to earn income through company dividends or buying and selling their stock for profit.
Investors considering stocks as an investment will want to educate themselves about this mutual relationship between companies and investors.
Stocks are traded in what is universally referred to as the stock market or stock exchanges. Keep in mind that the “stock market definition” loosely includes any single stock exchange or all stock exchanges in general.
In reality, there are a variety of stock exchanges throughout the world. The most notable in the United States are the S&P 500, the NASDAQ, the Dow Jones Industrial Average (DJIA), and the New York Stock Exchange (NYSE). Other notable world stock markets include London, Tokyo, Hong Kong, Shanghai, and Frankfurt.
The NYSE and the NASDAQ are the largest stock trading companies in the world.
The types of companies traded on each stock exchange vary and there are different types of stocks issued by each company.
The two most widely known types of stocks are common and preferred.
Other types of stock fall under labels of company size, style, location, or industry. Each company can further define stock as Class A or Class B. These designations may, as an example, refer to one class of the stock having more voting rights than the other.
To keep things simple, investors can focus on common and preferred stocks.
Common stock is a typical investment for active traders while preferred stock is considered by investors focusing on long-term increases in value with dividend income along the way.
Common stock owners can buy and sell the stock as well as exercise their right to vote at shareholder meetings and earn dividends from the company’s profits. Dividends are paid to common stock owners on a periodic basis, i.e. quarterly or annually. Dividends vary in amount based on earnings and each company’s policies, but are not guaranteed.
Preferred stock owners tend to buy and sell stock in a company with the expectation that their investment will provide ongoing income.
Preferred stock usually pays a fixed dividend, or regular portion of profits. Preferred stock shareholders receive dividends before common shareholders, even in the case of liquidation or bankruptcy of the company.
Despite the “preferential” distribution of dividends, preferred shareholders typically don’t hold voting rights at shareholders meetings.
Long-term advantages of preferred stock are the expectation that the security tends to gain in value and an expectation that the stock value is less likely to drop with less volatility in the market.
There are some essential terms that can help investors become familiar with the types of stock and the overall stock markets:
- Buy - purchase shares of stock in a company to hold or wait for a sell signal
- Sell - exchange shares of stock in a company for profit or minimize loss
- Bull market - stock market prices are expected to rise
- Bear market - stock market prices are expected to fall
- Rally - a sudden and rapid rise in the price of a stock or in the overall market
- Volatility - indicates how fast the market or a specific stock moves up or down
- Liquidity - level of ease in buying into or selling out of a stock
- Trading volume - how many shares of stock are traded daily, helps indicate liquidity
- Broker - person who buys or sells a stock for you for a fee
- Stock symbol - letters that represent the name of a company on an exchange, i.e. Microsoft is listed as MSFT.
Stocks Can Increase Income, Wealth
Is investing in stocks a good financial plan?
No, and yes.
If you’re looking for a “sure thing” for investing your hard-earned dollars, then stocks aren’t for you. All investors must understand that stocks are risky.
Any “sure thing” in stocks can turn into a financial catastrophe. Ever heard of Enron? How about Apple before it became what it is today? Do some research and you’ll understand the risk.
If you’re looking for a serious financial goal with great potential for profit and income, then investing in stocks is a very real opportunity. The stock market is open for business to anyone seeking to improve their financial standing.
The old adage, “buy low and sell high,” can play out as a good stock investing plan.
Trading or investing in stocks doesn’t have to be a complex process. It’s a fact there is plenty to learn about stocks and the stock market. It’s also a fact that understanding stocks as an investment vehicle doesn’t require a higher education degree, expensive tools, or years of tiresome studying to gain the necessary skills.
But don’t confuse this basic process as being “easy” money. Owning stock does not guarantee that investors will receive any monetary benefit from a company’s assets or earnings. You have to practice stock trading and treat it as a serious investment.
Investors must understand that any profitable financial endeavor will require a necessary level of work and commitment. This can be especially true for those who are new to stocks and investing.
If you have the money to invest, there is always a company willing to sell stock and a licensed investment brokerage available to arrange the transaction.
Get Professional Stock Investing Help
Every stock market investor is going to need an outlet to help with buying and selling stocks.
This can range from your neighborhood stock broker who manages your stock investments to a mostly hands-off online brokerage where the investor takes full control of all decisions.
The old, traditional method of stock investing required investors to decide on a stock, call or visit their broker, relay the price and number of shares to purchase, and the broker would then make buy or sell the stock on behalf of the investor.
Traditional methods are all but gone in today’s stock investing world.
Most shares are traded electronically with software offered through traditional and online brokerages. This has lowered the cost of stock trading while maintaining access to brokers who still can offer investing guidance and educational information.
Stock trading software includes access to historical trading data, news, a stock trading simulator, live stock market prices, educational resources, stock market charts, trading strategies, and various charting tools.
At Simpler Trading, our community of active traders use specific stock trading software to gain an edge in the markets.
TradeStation® and thinkorswim® are widely used among traders.
Professional traders at Simpler Trading suggest traders pick one trading platform and master its features. The goal as a stock trader is to develop a plan, proven strategies, and a proper mindset for stock trading.
Whichever trading software you use, brokerages provide access to stock markets for buying and selling shares from any publicly traded company. Brokerages do charge fees, and investors can “shop” for the brokerage with the best combination of lower fees, customer support, and investor guidance. There’s no doubt you’ve seen advertisements for low-fee brokerage services in this highly competitive market.
If you’re ready to trade stocks, your first investment research will be determining which brokerage to use.
A quality stock brokerage will be:
- Open and transparent about all fees and costs
- Accessible and knowledgeable customer service and account management
- Extensive market data and educational materials
- Track record of profitable investing and helping individual investors
- Advanced online software for trading stocks
- Maintains all required licensing and access to stock markets
Researching a brokerage, developing a strong level of trust, and committing to that brokerage’s services may be one of the hardest decisions in stock purchases. Study all options and make sure you’re comfortable with your decision.
Once you’ve selected a brokerage and are ready to make a stock purchase, buying or selling stock in a specific company is as simple as ordering any product online. Just determine the company stock you want to buy or sell, select the number of shares, and hit the order button.
Again, researching that next “great” stock will take time and effort before you hit that order button. Always search for the true value of a stock - company health, sales numbers, earnings history, and growth plans. Back up all this information with accurate technical analysis and you’ll be better informed about a company’s value and its stock’s potential as an investment.
When you think about stock trading, keep the process simple and focused.
While all it really takes to invest in stocks is the initial capital and a broker, investors will need to consider what type of stock trader they will be to manage their money.
Ask yourself these investing questions:
- Is your goal to buy stocks and hold them as a long-term investment, potentially earning dividend income over the course of years?
- Is your goal to buy and sell stocks more quickly to produce income, possibly trading regularly within days or weeks of your initial investment?
It may seem like a simple distinction, but there is a significant difference in the mindset of long-term stock investors versus stock traders seeking to take advantage of faster profit potential.
Stock traders who find a training program and a mentor can move ahead of traders struggling to gain understanding by reading the latest book about stocks for newbies or scanning information on the internet.
Seasoned stock traders understand that participating in a community of fellow investors helps build stock trading skills quicker.
Simpler Trading provides a bridge to other stock investors.
Stock investors connected to the Simpler Trading community can learn skills to minimize their risk and focus on stocks to trade. These trades are set up using a unique combination of analysis and strategies proven by our active trading mentors.
Simpler Trading also offers insight into which stocks to buy now, stock market trends, and effective trading strategies.
The Simpler Trading team works daily to support and promote consistent trading performance to offset the uncertainty of the stock markets and learning to trade stocks.
Join the Simpler Trading community for a boost to your financial goals trading stocks.
Stocks are a Worthwhile Risk for Profit Potential
There is financial risk in anything that proposes to make a profit, including stocks.
Stocks, and the world of investing in stocks, has often been portrayed in movies and the media and an exotic endeavor fraught with catastrophic risk.
The real world of investing in stocks doesn’t follow popular Hollywood depictions of risking insane amounts of money and going wild with exotic celebration parties before losing all your money.
Profitable investors in stocks are serious about the investment opportunity and how to increase wealth while limiting risk.
Take the time to learn all you can about investing in stocks and how the stock market works. Investing in stocks can actually be more intriguing than any Hollywood drama and result in a more positive financial outlook for serious investors.