Investing in Stocks – The Basics

Investing in stocks offers the potential for substantial gains over time. However, it comes with significant risks and can be volatile, so if you’re considering it, we urge you to do your research and understand the basics of stock trading before diving in.

A stock is a share in the ownership of a company. It can be bought and sold on a public exchange, which is how most people think of the stock market. Depending on the type of stock, it might also give its shareholders voting rights and certain financial benefits.

The main reason companies issue shares is to raise money. They may want to fund growth projects they can’t (or don’t want) to finance with loans, or simply need more cash on hand. Those funds can then help them grow, which makes the value of their stocks go up over time. This is called capital appreciation and is why people invest in stocks.

But a stock’s value can also go down if the company hits rough patches, doesn’t meet earnings expectations or experiences other setbacks. That’s why many investors diversify their portfolios by also buying other assets, like real estate and bonds, to diversify their returns.

It’s important to know that just because a stock is listed on an exchange doesn’t mean it is liquid, meaning you can easily buy or sell it. In general, illiquid assets are more risky and can have lower returns than their liquid counterparts.

When it comes to investing in stocks, it’s helpful to know that there are different kinds, and that they are often categorized by their size. Large-cap stocks represent the biggest companies, with mid-cap stocks in the middle and small-cap stocks on the bottom end of the spectrum. Shares in very small companies, which have a low market capitalization, are known as penny stocks and are generally more speculative.

In addition, some stocks pay dividends, which is a way for the company to return some of its profits to shareholders. However, dividends are not guaranteed and can be slashed by the company at any time. Finally, it’s important to distinguish between domestic and international stocks. In the US, this is usually determined by where a company’s headquarters are located, but the distinction can sometimes be fuzzy. For example, Philip Morris International’s headquarters are in the US, but it gets most of its sales outside the country.

In order to start investing in stocks, you’ll need to open an account with a broker or investment firm. This can be done online, and will typically require you to provide your name, address, phone number, employment status, investment goals, and risk tolerance. From there, you’ll be given the ability to select individual stocks, mutual funds and ETFs to build your portfolio. You’ll also have access to charts, graphs and other data that you can use to help guide your selections. As you become more familiar with the market, you can move on to more complex analysis and make your own stock trading decisions.

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