When a company goes public, it sells stock to investors, who become part owners. These investors are entitled to a share of the profits, if the company decides to distribute them or to reinvest them in the business. They also have voting rights in company meetings and are sometimes paid dividends from the company.
What Is a Stock?
A stock is a small fraction of the ownership in a business. It is a way for companies to raise capital to fund expansion, hire more employees and design new products or services. It is different from bonds, which are loans that a company offers to its creditors in return for periodic payments.
Buying and Selling Stocks
Investors can buy and sell stocks on a stock market exchange or in a private broker’s office. The price of a stock moves according to the supply and demand of that stock. When there is strong demand, the price rises. If there is weak demand, the price declines.
How to Buy Stocks
Once you’ve decided which stocks you want to buy, you place an order with your brokerage. This tells your broker what you want to buy and how much money you want to invest. The broker will then use this information to purchase shares for you, and it may take a little time before your orders are processed.
How to Manage Your Stocks
A good rule of thumb when managing your stock portfolio is to make sure it’s well diversified, or has no single stock holding more than 5% of its total value. This allows you to diversify your risk and protect your investment if one or more stocks in your portfolio lose value.
How to Pick a Stock
The most important thing to consider when picking a stock is what the underlying company does and whether it will be profitable in the future. For instance, growth stocks, which are those with the potential for significant revenue growth over a long period of time, can provide an interesting investment opportunity. However, these types of stocks are also typically more risky than defensive or cyclical stocks.
Cyclical Stocks and Non-Cyclical Stocks
If you’re looking for a high return, look for companies that have the potential to grow quickly. These stocks are more likely to outperform in down markets, and will be able to rebound when the economy starts to get better.
Dividends and Profitability
A key benefit of investing in stocks is that they offer the possibility for a significant return in the form of dividends. These payments are usually a percentage of the company’s earnings and are paid out to shareholders on a regular basis, depending on the type of stock.
Preferred stocks, which are issued by companies that have the ability to pay a fixed dividend for a predetermined period of time, can provide a higher yield than common shares. But preferreds can have their dividends cut if the company is going through financial problems.