If you want to join the renown investors’ league stock market is the way to go. However, stock market isn’t a get rich quick scheme. For it to yield substantial wealth, you must be patient as it takes time. Most people tend to confuse stock market with stock exchange or stock index. For any investment to yield results, you must understand its operations, merits and demerits.
Therefore, if you’ve been contemplating investing in stock market, we are here for you. We’ll give you everything you need to kickstart a prosperous stock market investment journey.
What is a stock market?
Before elaborating on stock market, we need to understand what a stock is. This refers to equities that represent ownership interests in a certain business.
Public owned corporations sell shares to public investors with two intentions. One, to get sufficient capital to run and expand the business. Stock selling also gives investors a chance to share in the company profit. One can either gain from their shares through dividends or by selling their shares to other people.
A stock market is a collection of stock exchanges where traders and investors can buy and sell shares. In the USA, stock market comprises of all security trading including stock exchanges. In a stock market, the price of shares is constantly fluctuating as per the law of supply and demand.
Types of stocks
Before investing in stock market, its imperative to consider the type of stock you want. There are different categories of stocks and all rake different values and returns. It’s a common thing to find most investors discussing stock in terms of their classifications. Some of the most common types of stocks include:
i) Preferred stock
These stocks give shareholders an opportunity to get back a percentage of their investment in case of dissolution of the company. Additionally, preferred stock investors get their dividends before their common stock counterparts.
Basically, preferred stock is more like the fixed income bond investment. In most cases, companies specialize in common stocks.
ii) Common stock
Most people go for these stocks. If you buy a common stock, you are purchasing partial ownership of the company. As a shareholder, in case of company dissolution, you get a proportional share of the remaining company assets. Additionally, you enjoy an unlimited upside potential but with high-risk potential. If the company dissolves without any assets, you end up losing everything.
iii) Domestic and international stocks
This is a categorization of stocks based on the company’s official location. It differentiates US domestic stocks from international ones.
However, a stocks geographical location doesn’t necessarily correspond to where the company derives its sales. A good example is Philip Morris International (NYSE:PM) with headquarters in US but sells their products exclusively outside. There is a very thin line between these two stocks.
iv) Other types of stocks
- Large-cap stocks
- Mid-cap stocks
- Growth stocks
- Value stocks
- IPO stocks
- Cyclical stocks
- Non-cyclical stocks
- Safe stocks
- Small-cap stocks
- Domestic stock
- International stocks
- Dividend stocks
- Non-dividend stocks
- Income stocks
How the stock market works
Public owned companies engage in stock market to accrue resources for company growth. Individuals can generate wealth through buying and selling of these company stock shares. Instead of borrowing and incurring debts, companies choose to list their shares on the stock exchanges for sale.
For a company to list its shares and access the capital it needs to run, it has to divulge information regarding its operations. The shareholders will also have a say in the running of the business.
Investors can generate income by two ways. They can sell their shares at higher value. With time as the business grows, the value of investors’ shares increases translating to capital gain.
Additionally, investors are entitled to dividends as the company profits grow. Even though there might be variations on individual stocks, an investor will rake approximately 10% profit per year. So, its one of the most reliable methods of your money multiplication.
Stock Market vs Stock Exchange
Mostly, stock market and stock exchange are used interchangeably. However, the two are absolutely different.
Stock exchange is a subset of stock market. A stock market constitutes many stock exchanges. Examples of Stock exchanges are New York Stock Exchange, Nasdaq etc. All these put together form a stock market.
When investors are talking about stock market performance, they simply mean the collection of public companies listed on stock exchanges.
Stock market encompasses multiple securities such as bonds, mutual funds, ETFs etc.
What is the meaning of Stock market index?
Stock market index tracks the overall performance of grouped stocks. Stock index constitutes a selection of stocks to measure the performance of those stocks in the market.
Examples of such categories include transport, energy, technology etc. Stock market indexes trade as options and future contracts. And you can also get them on regulated exchanges.
Value investing vs growth investing
Whichever method of investing you choose; value and growth investment are the basic approaches. Any investor will use one of these strategies to invest in stock market.
Value investment
This is an approach in which you typically invest in well established companies. These are companies with high profit returns and been so for a long time. Value investment focuses more on minimizing risk. You choose specific companies that will guarantee you regular returns. Although, investors wait to invest when the stocks are undervalued bargain.
Growth investment
In this strategy investors focus on companies with high growth potential. Here, investors are ready to risk big and tend to invest in upcoming companies. Technology companies are a good example of companies with high growth
potential.
How to invest in a stock market
There are several ways you can start your journey in stock market investment. Top of these include;
1. Online
This is the easiest and shortest way of purchasing stock. You can also use the discounted online brokers such as E-Trade, TD Ameritrade or Merrill Edge. You won’t pay any service fee and you’ll only pay negligible fees for other services like mutual fund. A new breed of app-based brokers has also come up. These give you an opportunity to do everything by yourself.
2. Full-service broker
These are companies that guarantee you full time guidance. They will also offer you assessment based on your budget and risk.
3. Investment clubs
You can also join a group of researchers and investors. These will give you advice without paying a lot of money. They can also walk you through and invest with you. The practical engagement is important for concept mastery.
4. Large investment banks
You can also use established investment banks such as Goldman Sachs or Bank of America. These organizations will offer you the necessary financial tips and also trading.
Conclusion
If you’ve desired investing in stock market, all you need is the relevant information. We hope the information you have should get you started. Although, as you prepare to invest, always be cautious of the market. You may encounter some brokers who are not legit. Stock market isn’t a Ponzi scheme that will get you rich quickly. You’ll need to invest hoping for long term investment.
Disclaimer
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