Building wealth through investing is a vital part of any financial plan. Investing in the stock market allows you to potentially grow your money at a higher rate than a savings account. With the advancements in technology nowadays nearly anybody can own stocks. Despite the popularity over the last few decades, most people don't fully understand stocks. Below is a breakdown of the basics of stock investments.
The Definition of a Stock
Stock is a share in the ownership of a company. As an owner, you have a claim on the assets and earnings of a company. Stocks are equity investments, as you acquire more stock, your ownership stake in the company becomes greater. There is risk involved, as there is in all investments but the maximum value you can lose is the value of your investment.
Stock exchanges are organizations that allow people the ability to buy and sell stocks. Similar to a farmers market or a flea market, this is where buyers and sellers can connect. There are many stock exchanges that exist in just about every country around the world. The largest exchanges in the U.S. are the New York Stock Exchange (NYSE), Nasdaq and the American Stock Exchange (AMEX).
Types of Stock
There are several different classes of stocks. The two main types of stocks are Common and Preferred. Common Stock is the most popular and widely held type of equity. A share of common stock represents a share of ownership in the company that issues it. Holders of common stock share in the company’s profits through increasing dividends and a rising share price. (Dividends- payments made to shareholders by the company out of it’s profits). Common stock shareholders receive the last claim on earnings and the company’s assets.
Like common stock, preferred stock is a share of ownership. The difference is preferred stockholders have a greater claim to any of the company's assets. Preferred stockholders receive their dividends before holders of common shares receive theirs. If a company is bankrupt and has to liquidate, holders of preferred shares receive money that is left over before holders of common shares receive any money.
In order to trade stock, you need to open a brokerage account with a stock brokerage firm. Broker’s fall into two categories, full service and discount brokers.
Full service brokers like to make the decisions for you and will call you frequently with ideas, suggestions and corporate research. Since full service firms offer a high level of human contact, they charge much higher fees than discount brokers. Full service brokers generally want you to have at least $25,000 to $100,000 in cash to invest.
Discount Brokers offer little in the way of personal attention but are much cheaper. You can’t walk into an office and get help and guidance for your investments like you can with a full service broker. Discount brokerages are more appropriate for people with a basic understanding of investing. You do the work yourself online.
Opening a brokerage account online is as simple as opening up a savings or checking account. Many firms charge an annual fee, an inactivity fee and require a minimum deposit that can be as much as $2,500 or more. However, there are a few brokerage firms that do not require a deposit to open an account.
Before opening a brokerage account you must determine what your investment goals and needs are. It is important to understand first what your accumulation goals are and the time you have to accomplish them.