Contrary to popular belief, it is not necessary to have a large sum of money to start investing. Investing little and often can make a significant impact on the long term returns achieved. Some experts would suggest that the key to understanding the stock market is to understand stocks.
A share of stock is the smallest unit of ownership in a business. If a person owns a share of a company's stock, they are a part owner of the firm. Stock is ownership, or equity, in a company. Investors buy stock in the form of shares, which represent a portion of a company's assets and earnings (capital). This gives them the right to vote on members of the board of directors and other important matters concerning the firm. If the company distributes profits to shareholders, then they will likely receive a proportionate share.
One of the unique features of stock ownership is the notion of limited liability. If the company loses a lawsuit and must pay a huge judgment, the worst that can happen is the stock owned becomes worthless. Creditors are not able to chase the owner's personal assets, however, that is not necessarily true in private-held companies.
There are two types of stock - common stock and preferred stock - with most of the stock held by individuals being the former. As a stockholder, the extent of a person's ownership (their stake) in a company depends on the number of shares owned in relation to the total number of shares on offer.
A stake can authorise people to vote at the company's annual general meeting, where stockholders usually receive one vote per share. However, in real terms most private investors' stakes are insignificant and this means many do not attend the annual general meeting and their votes revert to management in the form of proxy votes.
Common stock
The majority of stock held by members of the public is this sort - common stock. It has voting rights, along with the right to share in dividends. When the news reports that stocks have risen or fallen it always refers to common stock.
Preferred stock
Preferred stock is something of a misleading name as in reality in has fewer rights than common stocks in all but one area. However, this is an important area - dividends. Companies that issue preferred stocks usually pay consistent dividends and preferred stock has first call over common stock for these. Investors buy preferred stock for its current income from dividends, so savvy investors will look for companies that make big profits to use preferred stock to return some of those profits via dividends.
Risks
Most people acquire an interest in stocks and shares because of the potential for them to make a profit on their money. Stock prices, as you may already be aware, are based on demand, which is in turn based on the perception of the firm's future earnings prospects. The choice of stock - income or growth - is usually a question of the your attitude to risk. If you want to find out what kind of risk taker you are - click here to read our KYM Guide to Risk Taking. Income stocks are generally safer and are preferred by more conservative investors.
Growth stocks are often seen as a more risky option, but can offer far greater potential for wealth accumulation through capital gains in the stock price. However, until a person opts to sell their holding, these gains will not be realised.
Investors may wish to assess their appetite for risk and based on this choose the stocks with which they are comfortable. If you are keen to get involved in stocks and shares you may perhaps like to firstly select the stock you wish to purchase by opening a brokerage account.
Once this is done you will be able to get a basic understanding of the type of stock and shares you prefer, while also remaining on the lookout for three or four companies you may know and are interested in. As always, doing homework and researching might prove vital. Steps such as checking the background of the companies and their management are a good start.
You could then find the symbol of the companies and track the stock and this will probably allow you to start to see a pattern after a few weeks. Different types of investments can be made so it might prove important to decide which is preferable and could be a case of whether you want to buy and hold or buy and trade rapidly. The former type of investing comes with the belief that over time the company will grow and achieve a profit, while the latter is day trading and is used to make money on the patterns of price fluctuations.
Symbols
A stock symbol, or "Epic" code, is a stock exchange's standard abbreviation of a stock's name. These can be found wherever stock performance information is published, for example in newspaper stock listings and investing sites on the internet.
Alongside the stock symbol it is possible to find the most important performance indicators for that particular stock. Once the stock is purchased this symbol will be used to find and monitor a stocks' performance.
When is the right time?
The way to make a sizeable profit on the stock in simple terms is to invest in a great company at a good price and then leave it alone for a number of years. However, money can be made on a more short-term basis and the right time to start investing will always depend on your individual circumstances. However, as mentioned it is widely noted that the longer you are invested in the stock market, the greater your chances of investing success.
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Author: KYM Editor
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