Investing in StocksBasic Overview of Stocks

Stocks are a financial avenue companies use to raise money for their business. As an investor, you are purchasing a small percentage of ownership in that company. This allows you to share in the profits, growth, and dividends of the company.

As an investment, stocks have provided a higher annual rate of return than other investments, such as bonds or cash alternatives. But with that higher chance of reward, comes a higher chance of risk. They have a higher volatility than bonds and there is no guarantee of performance. It is important that you weigh the pros and cons of any investment before purchasing.

In this article, we will go over some of the basics involved with investing in stocks. Including the different types of stocks that there are, the risks that are out there, and how to start investing.

Types of Stocks

There are different ways to classify stock: either based on their ownership or based on company specifics. These classifications are important to know since they will have a bearing on the risk that you are taking on by purchasing that type.

  • Classification Based on Ownership:

    This classification separates stock based on the different ownership rights and privileges that they grant. There are two main types of ownership classified stock.

    • Common Stock: This is the typical form that most stock takes. It represents ownership in a company and a claim on their dividends and profits. It also gives the stockholder the right to vote to elect board members. This type also offers the highest rate of return.
      However, if the company were to go bankrupt, common stockholders do not receive reimbursement until creditors, bondholders, and preferred stockholders have been paid.
    • Preferred Stock: Preferred is a less common type of stock. By purchasing preferred stock you are granted a degree of ownership, but they do not come with the same voting rights as common stock. It also has a lower rate of return than common stock.
      But preferred stock also has some benefits. If you purchase a stock you will have a fixed lifetime dividend, whereas common stock does not. Preferred stockholders will also be paid back before common stockholders in the case of liquidation. However, you would still not receive payment until after any creditors and bondholders.
  • Classification Based on Company Specifics: Each company has a different business growth model. The differences in growth models are represented in how the company’s stock is classified.
    • Value Stocks:

      Value stocks are sold by companies who are going through temporary problems and thus being ignored by investors. Due to this, the company sells their stock at a price much lower than their relative value. These stocks take longer to build their value and are good for long-term investors.

    • Income Stocks:

      These are issued by large companies with stable incomes and they are known to pay steady dividends. Typically, these are energy or utility companies. However, the share price does not usually appreciate greatly in value.

    • Blue Chip Stocks:

      Blue chip stocks are from very large well-known companies that have good reputations and long records of profit and growth. Think Dow Jones or S&P 500. They have steady stock price growth and usually pay dividends.

    • Growth Stocks:

      This type of stock is issued by companies that are in new or fast-growing industries. These stocks accumulate earnings at a faster rate than the market average. This stock class is extremely volatile. As quickly as you earn money, you can lose it. Using warrior trading can teach you what to invest in and what the best way is to start earning money through the stock market.

    • Penny Stocks:

      These are from companies that have a short and erratic performance history. They typically sell for less than $5 a share. They are extremely volatile.

Understanding Risk

Diversifying with multiple types of stocks, from multiple companies and multiple industries will help to minimize risk. However, there are certain risk factors that we have no control over. These can affect stock value in a good way or a bad way. These factors include:

  • Investor Actions: A large number of investors simultaneously buying or selling the stock can drive the price of your stock up or down.
  • Business Conditions: A new patent, change in profits, a pending merger, or litigation, can all have an affect on the stock.
  • Economic Conditions: Employment rates, inflation, inventory, and consumer influence all can change stock prices.
  • Government Actions: Any governmental decisions that affect interest rates, taxes, trading policies, or antitrust litigation can also affect stocks.
  • Global Economy: Any changes in foreign exchange rates, tariffs, or diplomatic relations can have an effect on stock prices.

It is very important to understand the different forms that risk can take so you are able to make sound investment decisions and minimize your losses.

Purchasing Stock

To begin purchasing stock you will need to set up a brokerage account. A qualified investment advisor can help you to complete this process. They will also be able to help you choose stocks. They can find stocks that will perform well and fit your risk tolerance profile. A good investment advisor can balance the chance of making a profit with the risk of losing money. Also, they will manage your funds from day to day so that you do not have to worry about it. Alternatively, you could also take help of stock trading software that provide commission-free trading with market center access for US stocks and options. That said, trading apps like us.tradezero.co typically facilitate analysis and trading of financial products in real time, meaning you can buy and sell stocks from the comfort of your home if you chose to take the trading platform route.

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