You can certainly find a gazillion articles online about how to invest your money wisely, but if you’re truly inexperienced, you may be left with investment questions so basic…
Investing in stocks is an easy and profitable way to build wealth but can seem intimidating for beginner investors. Before you plan out your investment strategy, it's important to understand some of the basic terminology, concepts and risks involved. This article will help get you started on your financial journey.
Stocks represent Ownership Certificates of Companies. Individuals can purchase shares from a particular company’s Ownership Certificate making them shareholders. There are basically two types of stocks, Common and Preferred. Common stocks allow the shareholder to earn dividends, earnings growth and voting rights. Preferred stocks have no voting rights but they do have priority over common shareholders when it comes to dividends and bankruptcy claims.
Stocks can be bought and sold by using a licensed brokerage firm or an individual broker who makes the trade. A wide range of services are available, from the full-service brokerage firm which offers advice, opinions and a personal investing relationship to a discount brokerage that will simply execute the trade for you with no questions asked or opinions offered.
The cost of trading varies widely from $5 for a discount broker to upwards of $200 for a full-service brokerage firm. Charges will also vary depending on the method of trade, such as an online or phone order. Be aware of hidden fees such as transfer fees, maintenance fees and inactivity fees.
Acquiring knowledge on trading stocks is quite easy and readily available. Numerous books have been written on the subject and can be purchased or borrowed from the local library. If opening a stock broker account, free information can usually be found on their website. A mentor can provide a good understanding of stock trading, the risks involved and valuable advice. Many online publications offer subscriptions to stay informed of the market on a timely basis. Before making the plunge, follow the market and practice trading without the use of real money.
Day trading involves buying and selling financial securities, such as stocks and currencies, during the course of a day with the goal of making a profit. These securities are closed out at the end of each day and the traders start over the next day. A day trader’s risk is limited because the security is sold at the end of the day but it can also limit profits. When a stock is held for a longer period of time, it has the potential for growth to accumulate.
Individuals can invest in the stock market with just a little amount required. A brokerage account can be opened that allows investing with as little as $500.00 and even small monthly contributions can be as low as $50.00 a month.
Stocking trading can be fun and rewarding, especially when it comes time to decide what to invest in. Companies with a product or service that is unique or difficult to imitate have a stronger competitive advantage and could be a good investment choice. Become familiar with the company’s management and find out their industry experience and their personal stake in the company. Are they partially compensated based on the company’s performance? Will the company will be around for the next 20 years? Will new technology replace its business or is management looking to move the company in a new direction?
Base your decision with the help of an advisor and/or from the information you’ve gleaned in your research through annual reports and letters to shareholders and by researching the company’s past performance history. Understanding your stock picks will provide you with more confidence when laying out your financial roadmap.
Long-term investments typically show strong histories of profitability and growth in dividends, but remember that if you’re investing for the long-term, do not panic and sell when stocks drop as they will usually recover and earn more over time. The market will repeat itself in the long term so there is much less risk, more peace of mind and no need to study the market on a daily basis. Holding high-quality stocks in your portfolio is a steady and consistent way to build wealth.
Investing in stocks on a short-term basis does carry risks and it’s important to know the market. Be sure to become familiar with and monitor the companies and spread your stock purchases over different companies. If a company does fail, you will feel more comfortable knowing you have other investments. Decide if you want to spend the time required to research companies, reading through reports, charts and other background checks. If you don’t have the desire or time, you may be better off investing for the long term. If you have a minimum amount of money available to invest, trading may become too expensive because of the trading fees involved. You may be better off with long term investing.
An important question to ask yourself is “How much money am I willing to lose if something goes wrong?” This will help in determining where you should invest.
Investing involves accumulating wealth over an extended period of time through the buying and selling of stocks, bonds, mutual funds and other financial instruments with the goal of making large profit margins.
Stock trading involves more frequent transactions, usually within days and taking advantage of fluctuating stock prices with the goal of accumulating faster and smaller returns but regular profits.