A stock is a security that represents fractional ownership in a company. By purchasing stocks, an investor is buying a portion of a specific company, and therefore entitled to a fraction of said company’s earnings in the future. These specific fractional portions of a company are deemed “shares”. By buying shares (or stock, as it were) in a company, the investor becomes a “shareholder” in the company. Typically, companies sell shares of their stock to generate profit.
The two principal forms of stock are “common” and “preferred”.
Common Stock – This form of stock gives the shareholder the right to vote on the corporate policy of the specific company, and elect members to its board of directors.
Preferred Stock – This form of stock contains all the characteristics of common stock, but is classified as “nonvoting” (meaning the shareholder cannot vote on corporate policy, or elect members to a board of directors). However, it offers more financial benefits and protection to the shareholder. For instance, preferred stocks provide guaranteed income by paying dividends at regular intervals. Additionally, in a liquidation preferred stockholders take precedence over common stockholders, by receiving assets first.
Stocks are either traded on stock exchanges, or privately. Suppose, for instance, Company X makes very good chocolate. Company X’s products are so popular, that it wants to expand so it can sell its chocolate globally. Therefore, it must raise capital for the endeavor. Typically, to raise capital a company either takes out a loan, or issues shares of stock (deemed “going public”). Thus, by selling shares of stock to investors, Company X can raise capital without going into debt.
Say Company X wants to raise $1,000,000 to expand globally, and decides to issue 1,000 shares of its stock – thus, each share will represent 1/1000th of the company. When Company X goes public at the IPO (initial public offering), each share will therefore be worth $1,000. Presuming that Company X’s profits begin to increase, then its stock price typically will also rise. Conversely, should Company X’s global expansion not prove successful, then its value could decline, as could the market value of the shares.
The two ways an investor makes money from stocks is either through stock appreciation or dividends. Stock appreciation simply means that the market value of the shares of a company have increased in price. In this instance, an investor would make capital gains by selling the stock off at a higher price. Dividends, on the other hand, are payments paid regularly to shareholders from the percentage of a company’s profits.
It is crucial to understand that because there is the potential for volatility in the stock market, stock trading is considered speculative and riskier than some other investment vehicles. Stock trading has the potential for significant financial loss and is NOT appropriate for all investors.
There are a few steps that you can take for effectively researching stocks.
Collect the financials of all the companies that pique your interest. All corporations are required by the US Securities and Exchange Commission (SEC) to file 10-K and 10-Q forms. A 10-K form is a detailed annual report of a company’s financial performance including important documents like a balance sheet. Additionally, a 10-Q form is the quarterly detailed update of a company’s financial performance. This information is conveniently available to investors on prominent financial news sites, or on brokerage websites.
Pay specific attention to things like revenue, price-earnings ratio (P/E), earnings and earnings per share (EPS), return on equity (ROE), return on assets (ROA), and net income when perusing a company’s financials.
Utilize the comprehensive stock trading research tools provided by your broker on their specific website – they can prove indispensable.
The simplest way for an investor to buy and trade stocks is via a broker. Because there are numerous brokerages, the choices can be a bit overwhelming, especially for beginners. Here are some of the most popular and respected online brokers.
Fidelity stock trading is a popular choice for investors who want access to equity trading, international trading, and IPOs. In addition, Fidelity offers comprehensive research tools and no commission for online US stock trades.
Charles Schwab stock trading is another popular choice for investors. The company has no minimum account requirements, $0 commission for online stock trades, and provides access t comprehensive research and trading tools.
E*Trade stock trading is a good choice for investors who want professional guidance, in addition to access to comprehensive research tools and market data that is intuitive and user-friendly.
If investing in stocks is something that you are interested in, give this free stock trading simulator a try before leaping into the real-world stock market. It’s fun and informative and will help you hone valuable skills and techniques to become an effective trader.
Here is a comparison table examining the different types of trading.
Type of Trading Best Suitable For Risk vs. Potential Return Control Over Investments Research and Legwork Needed
Options Active Traders Lower-level Risk
(When Done Correctly)The investor has complete control over which companies are selected, and what options contracts are chosen. All research and trading is done by the investor.
Stocks Beginners and Long-term Investors High risk, yet has the potential for larger gains The investor has direct control over all invest decisions. All research and trading is done by the investor.
ETFs Beginners and Long-term Investors Lower-level Risk Professionally managed investment vehicle. All research and trading is done by a financial professional. Investors are charged a fee called an "expense ratio".
Bonds Beginners and Long-term Investors Lower-level Risk If investing in individual bonds (rather than bond ETFs) the investor has direct control over all invest decisions. All research and trading is done by the investor, if investing in individual bonds.
Mutual Funds Beginners and Long-term Investors Lower-level Risk Professionally managed investment vehicle. All research and trading is done by a financial professional. Investors are charged a fee called an "expense ratio".
Futures Active Traders Medium-level risk (when done correctly) The investor has complete control over which futures contracts are chosen. All research and trading is done by the investor.
Swing Trading Active Traders High risk, yet has the potential for larger gains The investor has direct control over all invest decisions. All research and trading is done by the investor.
Day Trading Active Traders High risk, yet has the potential for larger gains if done correctly. The investor has direct control over all invest decisions. All research and trading is done by the investor.
Commodity Trading Beginners and Active Traders High risk, yet has the potential for larger gains The investor has direct control over all invest decisions. All research and trading is done by the investor.
Trend Trading Beginners and Active Traders High risk, yet has the potential for larger gains The investor has direct control over all invest decisions. All research and trading is done by the investor.
The simplest way for an investor to buy and trade stocks is via a broker. Some of the most popular and respected online brokers for stock trading include Fidelity, Charles Schwab, E*Trade, and TD Ameritrade.
Research individual online brokerage firms to decide whether a “full-service” or “discount” company is the best fit for you. Full-service brokers typically have a hefty minimum account requirement, yet provide professional trading advice when requested. Conversely, discount brokers often have no minimum account requirement, but investors could face additional fees. All online brokers offer research and educational trading tools which is an added incentive for investors.
There are two ways for an investor to make money in stocks: stock appreciation, or dividends. Stock appreciation simply means that the market value of the shares have increased in price. In this instance, an investor would make capital gains by selling the stock off at a higher price. Dividends, on the other hand, are payments paid regularly to shareholders from the percentage of a company’s profits.
However, it is crucial to understand that because there is the potential for volatility in the stock market, stock trading is considered speculative and riskier than some other investment vehicles. Stock trading has the potential for significant financial loss and is NOT appropriate for all investors.
With regards to stock trading, the primary objective is to buy stocks at a low price, and sell stocks at a higher price.
Three principle reasons to sell stock include: requiring cash immediately, becoming more risk-averse, or there has been an exponential rise in share prices of the specific company.
If you are interested in investing in dividend stocks that will provide income-generating opportunities, your best bet is buying individual dividend stocks through your broker, or via an index fund - either a mutual fund or an ETF (exchange-traded fund).
When researching prospective companies or funds to invest in, look for the “dividend yield” to see if it pays dividends. This will be a percentage denoting the ratio of the amount paid out compared to the fund’s or company’s share price.
Stocks and ETFs are similar in that they both are traded on exchanges throughout the business day, and have an identifying ticker symbol. However, a stock is a security that represents fractional ownership in a company.
On the other hand, an ETF is an investment vehicle that is comprised of a collection (or basket) of securities like stocks. This is a major benefit of ETFs, because they can balance financial risk by investing in numerous securities at once, thus providing a diversified portfolio.
Volume with regards to stocks means the number of shares that are bought and sold over a certain timeframe. Volume and price are key indicators that large institutional investors like fund managers are either buying or selling large quantities of specific stocks. It is these types of investors that influence whether a stock price will rise or fall.
RSI is an acronym for “Relative Strength Index”. It is a momentum oscillator that gauges price fluctuations in a stock price, and the speed of which that change occurs.
There are three key factors to take into account when reading stocks.
1) When looking at a stock chart, gauge what the trend of the stock is. Whether the share price is increasing (uptrend), decreasing (downtrend), or essentially a sideways drift where there is little fluctuation in price.
2) Pay particular attention to the price and volume of the stock. Ultimately, it is large institutional investors that influence whether a stock price will rise or fall, by either buying or selling large quantities of specific stocks.
3) Determine whether a specific stock is being supported by large institutional investors such as fund managers, for example, or whether it is meeting resistance on an uptrend.
Ultimately, the number of stocks that you own is dependent on your investment goals. It is crucial to remember that a diversified portfolio is key for any investor.
A stock is a security that represents fractional ownership in a company. By purchasing stocks, an investor is buying a portion of a specific company, and therefore entitled to a fraction of said company’s earnings in the future. These specific fractional portions of a company are deemed “shares”. By buying shares (or stock, as it were) in a company, the investor becomes a “shareholder” in the company. Typically, companies sell shares of their stock to generate profit.
The two principal forms of stock are “common” and “preferred”. Common stock gives the shareholder the right to vote on the corporate policy of the specific company, and elect members to its board of directors.
Preferred stock contains all the characteristics of common stock, but is classified as “nonvoting” (meaning the shareholder cannot vote on corporate policy, or elect members to a board of directors). However, it offers more financial benefits and protection to the shareholder. For instance, preferred stocks provide guaranteed income by paying dividends at regular intervals. Additionally, in a liquidation preferred stockholders take precedence over common stockholders, by receiving assets first.
Conversely, a bond is a debt instrument in the form of a loan given by an investor to a borrower such as a company or government. These entities issue bonds as a way of raising money to fund expenses or new projects. A company or government will issue a bond as a means of borrowing money, and in turn, an investor (or bondholder) receives interest payments on this loan, plus repayment of the principal investment.
The bond market is a component of the credit market. Unlike stocks, bonds are not traded publicly and there is no central bond exchange. To a certain degree, the bond market is regulated by the Financial Industry Regulatory Authority (FINRA), which is a corporation that operates as a self-regulatory authority (SRO). FINARA’s Trade Reporting and Compliance Engine (TRACE) reports bond trading prices and volumes. It is important to understand that there is not the same level of transparency in bond trading, as there is with stock trading.