Are you curious about how stocks work? Here are important things you need to know about stocks investment before spending the fruits of your blood and sweat.
Buying stocks means co-owning a company When you buy a share of stock, you become a shareholder, or a part owner in the company with a claim on every asset and earnings. As the economy grows, so will corporate earnings and, over time, stock prices. Since 1926, the average stock has returned more than 10 percent a year, making stocks investment more lucrative than savings bonds.
Stocks are classified by size, style, and sector
Size is defined by a company’s market capitalization. Small cap, micro cap, or penny stocks refer to companies with market capitalization under $500 million. Large cap companies tend to be more stable have a lower growth potential than other stocks because of their big capitalization.
There are three styles of stocks: growth, value or cyclical. Growth stocks deliver above average gains when business is good, but as soon as growth slows down those stocks tank. A value stock is the exact opposite of a growth stock it trades at a lower than average rate but its price may not reflect the true worth of the company. Cyclical stocks tend to fluctuate a lot as investors try to guess when the next economic boom or bust will come.
Stocks can also be categorized according to sector or industry. Finance, technology, and healthcare are the most progressive sectors, while utilities and consumer product companies are more stable and have mild to moderate growth.
Building your portfolio
In stocks investment, a portfolio is defined as a collection of assets stocks, bonds, mutual funds, and equities held by an investor. Ideally, your stock portfolio should consist of 15 to 20 financially sound companies across seven or more different industries. If you are looking at long-term stocks investment, these companies should offer above average earnings growth.
Before choosing companies for your stocks investment, do your homework. Make sure you know enough about the company’s products or services. Read the company’s financial reports and take note of the company’s revenue, earnings, debts, and assets. Find out if the company has a history of mismanagement, bank frauds, money laundering, corruption, and scams.
How to buy stocks
If you have decided you want to dabble in stocks investment, the first step is finding a good stockbroker. Speak to several qualified brokers and arrange to meet face to face or visit their websites to determine their fees, commissions and reliability of their services. Once you find one you are comfortable with, open a trading account with the stockbroker.
Select the stocks you want to buy. If you place a market order with your broker, then you are saying that you are willing to buy the stock at the current market price. A limit order means you are buying the stock at a specific price. If the stock dips to that price, your order will be automatically filled. Limit orders can be placed as a day order, which automatically expires if it is not executed during that trading session, or good until canceled, which means indefinitely.
Enter the stock’s trading symbol in your broker’s online trading platform and buy the stock. You can set a stop-loss order, which instructs your broker to sell the stock if the price drops to a level you specify. However, in a volatile market where share prices move up and down within minutes, a stop-loss order may do you more harm than good. Because a stop-loss order will automatically cash out your stock on a momentary dip, your stock will not have a chance of recovering from a loss when the share prices head back upward.
Monitor your stocks investment by checking their prices several times daily through your broker or the NYSE, NASDAQ, AMEX, OTCBB and the Pink Sheets.