The stock of a corporation is different pieces of that company. If you own a share of stock of a company, that means you have ownership of that company. Back before technology took over the world, investors received what is called a stock certificate. A stock certificate was a physical piece of paper that lists the details of the stock transaction details, how many shares, and at what price. Today, all of this is electronic. You still get a certificate, but it is at your brokerage, and more than likely, also in electronic form. By buying a company’s stock, you are betting that the said company will grow and be profitable. Stocks are a staple in any retirement account, but there are many people who rely on stock trading for a living.
When a corporation wants to raise money for expansion or just cash out of the company, they issue stock. When a company issues stock for the first time, it’s call the initial public offering. You will see this written as IPO. Stock bought on indexes are not IPOs, but have traded hands at least once. You have to purchase IPOs from the company that is issuing the shares.
How a Company is Broken Down into Individual Shares of Stock
A stock represents one piece of a company. The company may have issued 10 shares or 10 million shares of stock to investors. If the company is divided over 100 shares, 1 share equals 1%. If you purchase 1 share, technically you own 1% of said company. When a company wants to seek investors money by selling their stock, they do what is called an initial public offering. An IPO is simply the first time a company is selling shares to the public. After the initial public offering, the company’s shares are traded in the secondary market. The secondary market consists of shares that have changed hands and are not being offered to the public for the first time. This is also called trading.
Why does a Stock’s Price Change?
When everything is boiled down, a stock’s price is based on hope. When a company is expected to make a lot of money in the near future, then more people will purchase that stock. Just like products, the more demand for the product, the more it usually costs. If no one wants a certain product or service, that product’s price will have to be reduced in order for anyone to purchase it. Same goes for stocks. One easily understood example of how supply and demand affects the stock market is Blockbuster. When movies started being downloaded online, being watched on Netflix for nine bucks a month, or available in machines at the grocery store for one dollar, Blockbuster started to go to bankrupt. This made the stock price plummet.
How to Make Money From Stocks?
The main way to profit from buying and selling shares of stock is to buy low and sell high. This is much harder than it sounds, but if you ever get really good at predicting stock prices in the future, you can make a ton of money. If I were to buy 100 shares of Walmart stock for $100 per share, the total price of the purchase would be $10,000. Say a year from now, Walmart is making tons of money and the stock now trades at $110 per share. If I were to sell all of my shares at $110 per share, the total of all of my shares would be $11,000; therefore, I would have made a 10% profit on that investment.
What are Stocks Dividends?
Another way that stock investors and traders can profit from risking their money is that if a company in which they own shares pays what is called a stock dividend. A dividend is money that is paid to shareholders of a company. A company can pay a dividend every quarter, semiannually, or even annually. Dividends vary, but a solid stock dividend averages around 3% per year. For exampleif Apple stock (AAPL) is trading at $100 per share and pays a dividend of 1%, the holder of that stock would receive a check of $1 per every share of Apple stock he/she owns. The dividend is taxable, but isn’t it nice to be getting equity out of your investment without having to sell any shares? Dividends are not guaranteed and the board of directors of that particular company has to vote to pay shareholders.
When you are just starting to learn what stocks are and how to actually trade them, you made run across articles about the two different types of stock, preferred and common stock. Common stock is what 90% of investors invest in. These shares trade on indexes. Wall Street has three major stock exchanges, S&P 500, Dow Jones, and the Nasdaq. Preferred stock holders have more privilege than common share owners. Stockholders normally never get paid if a company goes bankrupt. Preferred share owners would be ahead of common shareholders when the company liquidates its assets. This means if the company went under, preferred shareholders are more likely to get paid. The bondholders, of a company will get paid back first, then preferred shareholders, the lastly, common stock shareholders. If a company in which you own stock goes bankrupt, do not get excited when they start liquidating assets.
Rarely, unless there have been charges filed, do common shareholders get repaid.
Categories of Stocks
Generally, there are two types of stocks: Blue chip and growth.
Growth stock simply means the company is still in the growth phase of the business cycle. In this phase, companies have not proved they can earn a profit. These companies are also very risky. Growth company’s stock is usually very risky, but if the company can prove they can turn a consistent profit quarter after quarter, the stock price will go through the roof and the shareholders will get paid for their risk exposure. I would consider penny stocks growth stocks. Think about it, the said company hasn’t proven to be profitable, even some have yet to even be able to produce the product before going public, if you were to buy their stock, you are simply gambling. There are no pricing models to help you determine a target price, you are simply betting on their future ability to produce.
Aside from penny stocks, there are a lot of really good growth stocks in which the future looks promising. A classic growth stock is Apple. Investors in the mid 80’s are filthy rich today because of the company’s success. They took a chance on the stock and it paid off big time. All companies have to go through a growth stage, but investing in growth stocks is all about timing. Obviously, not every company makes money.
Learn about mutual funds http://wallstreetnewbie.com/2016/02/20/what-are-mutual-funds/
Blue Chip Stocks
The second category is call blue chip. Blue chip stocks are stocks of companies that have proven to make money consistently over the years. When I hear blue chip, I tend to think of companies like Microsoft. Microsoft is more than likely not going anywhere anytime soon. No, they aren’t coming out with new products every quarter, but they are profitable on their current products. Think of Coke. Coke never changes, yet they always seem to make money. Coke has stood the test of time. The stock prices of blue chip companies usually do not change too much, but these companies usually pay a pretty good dividend every quarter. Their consistent dividend is why people love the stocks. Blue chip stocks are more for buying and holding. Blue chips won’t make you money the first week, so don’t get frustrated.
What are the best stocks to buy?
Although there is no 100% correct answer to this, because it is a very vague question, I would say the best stocks to buy are the ones you will make money on. I know, that’s a dumb answer, but that is the point of owning stocks. 9 time out of 10, I recommend blue chip companies for their consistency in paying dividends and being defensive during an economic downturn.
I hope this post helped explain what are stocks. If you are just getting in to trading stocks but know the basics, I highly encourage you to watch either Consumer News and Business Channel or Fox Business channel to pick up on as much stock market information as you can. If you are really serious in wanting to learn how to trade stocks, write down terms and questions you hear on these channels and research them. You will learn more about the market this way than reading books or taking finance courses.
There is a wealth of information surrounding the stock market because in order to make money in the market, the more information the better. Not only will you learn about economics and politics, you will also learn about international trading and basic business principles. After reading this post, you should be able to buy your first stock. There is so much more to learn about the stock market and trading stocks. Be patient and just try to learn something new every day and before long you will be trading stocks like a pro.