To make a long story short, when you buy stock, or shares, you own a slice of the company. Stock is what is referred to as an equity investment and stocks are shares of a particular company that are traded on the market both privately and publicly. By buying a shares in a company, you are technically a part owner, albeit a probably very small part. These shares (or stocks, as these two terms are synonymous) are traded publicly. By having shares in a company, you are entitled to share in the profits the company makes. You also have the right to vote on certain company decisions made in stockholder meetings.. You can buy stocks either from a stock exchange or over-the counter. Over-the-counter stocks (OTC) are those that do not meet the regulations required to be on a more centralized exchange market; this includes stock in smaller companies unable to meet listing requirements.

Why do people buy stocks?

Most of the time, people buy stocks for one of the following two reasons:

• They expect the stock to increase in value over time (growth, or capital appreciation): a hoped-for increase from the share’s purchase price to the actual market price somewhere in the future)
• They expect the corporation to pay them dividends, which is a portion of its profits (income): dividends are important, as they pay shareholders profits earned from an investment.

In fact, many stocks offer the best of both worlds, and that is both growth and income.

When a corporation issues stock, the company receives the proceeds from that initial sale. After that, shares of the stock are traded, or bought and sold among investors, but the corporation gets no income from these trades. the price of the stock moves up and down depending on how much investors are willing to pay for it at a particular time.

The value of a stock is determined by a number of factors. As a rule, stocks tend to be well ahead of inflation, bonds, and other investment vehicles when it comes to return on investment, and that makes them the best option for long term investing. What it costs to purchase a stock does not tell you what its earning potential is, and various ratios have been developed to assess whether a stock is overvalued or undervalued.

Common Stock

Most stock that is issued for sale by corporations is common stock. Shareholders can vote on any issues that may affect the corporation; one vote per share is allowed. Owning it entitles the buyer to collect dividends if the company pays them, and you can sell shares at a profit if its price increases. The catch is that stock prices are pretty volatile, so you have to understand that your shares could lose value, especially in the short term. By “volatile”, we mean that stock prices may increase or decrease rapidly. One of the ways to protect yourself against this volatility is through diversification. In that same line of thought, it’s usually recommended to consider the benefits and risks of investing abroad and put some money out of the US market to benefit from growth in other countries.

If the company goes bankrupt, common shareholders only receive what remains after creditors, bond holders and preferred stock holders have been paid. This makes common stock more risky to own than bonds and preferred shares, but common stocks frequently rewards investors with higher returns over the long run.

Preferred Stock

Some companies issue preferred stock in addition to common stock. These equity investments (they do, after all, also represent ownership in a corporation), which also trade in the secondary market, are listed separately from the company’s common stock and trade at a different price. Preferred stock dividends are paid before common stock dividends and are often guaranteed, unlike those on common stock. Preferred shareholders are also more likely to recover some of their investment if the company fails. Conversely, preferred stock owners do not have voting rights.

The prices of preferred stock tend to change little over time, which means they pose less risk. But the dividends typically aren’t increased if the company’s earnings increase, which limits potential gains. Preferred stocks are a stable investment vehicle, pretty much guaranteeing a timely dividend. The combination of these various characteristics help explain why preferred shares are sometimes described as hybrid investments – a combination of fixed income and equity.

Preferred stocks can be exchanges for common stock, and the issuer has the right to redeem the investment at all times. The difference between preferred stock and common stock are the voting rights and a fixed income.

Classes Of Stock

Companies may issue different classes of stock, label them differently, and list them separately on a stock market. Sometimes a class is indicative of ownership in a specific division or subsidiary of the company. Other times it indicates that shares that sell at different market prices, have different dividend policies, or impose voting and/or sales restrictions on ownership.

Stock Splits

A stock split occurs when a company creates more shares of their company by splitting the amount of shares they have, doubling, tripling, the amount of shares, or more.

So why do stocks split? Well there are many reasons why the management of a company might decide to split its stock. It might for instance they may want to make it more affordable for the average man. If the stock is trading at a very high price, let’s say $200, then a lot of people will be unable to buy the stock, so it will be overlooked. Corporations have come up with a way to make their shares more accessible, by splitting the cost to lower the price, with the expectation that it will stimulate trading. When a stock is split, there are more shares available, but the total market value of the company remains the same.

Say a company’s stock is trading at $200 a share. If the company declares a four-for-one stock split, it gives you four shares for each one you own. At the same time, the price drops to $50 a share. If you owned 300 shares selling at $200, after the split you now own 1,200 shares selling at $50. The value of your investment in that company remains the same: $60,000.

The initial effect of a stock split is no different from getting coins in exchange for a dollar bill. But the price may move up toward the pre-split price, increasing the value of your stock.

Stocks can split three-for-one, three-for-two, ten-for-one, or any other combination.

Reverse Stock Splits

In a reverse split, the corporation reduces the number of shares outstanding (say ten shares for five) and the price increases accordingly. Again, if you owned $60,000 worth of stock before the reverse split, you will own $60,000 worth of stock after the reverse split too. Typically the motive is to boost the price so that it meets a stock market’s minimum listing requirement or makes the stock attractive to institutional investors, including mutual funds and pension funds, which may not buy very low-priced stocks.

There’s an awful lot of people who want to start investing and would like nothing more than to find something like an “Investing for Dummies” guide so they can figure out how to start investing in the stock market. Learning how the stock market works is a long process and there’s definitely the possibility to lose money while you’re trying to understand how the whole thing works.

One of the first decisions you’re going to have to make as a beginner investor is what kind of company you’re going to use and what level of service suits you best. Back in the day, there was really no option but to go with a full service broker because the Internet wasn’t around just yet. Since it became ubiquitous, one of the major effects has been that anyone with a computer and Internet access has the chance to start investing. Discount brokers such as E-Trade and Zecco have introduced great yet inexpensive services that allow you to do all the investing yourself.

Of course, what that means is that all the research is now your responsibility. You have to learn how to read stock charts, how to read and understand financial reports, and all of that financial literature that’s going to be fundamental for you if you need to make the right decisions to minimize the possibility of you losing money. Those discount brokers just act as middlemen; you save money on your transactions, and you keep full control of your money and where it goes.

There’s that often overlooked too which is nonetheless very important when learning how to invest: we’re talking about an investing budget. There’s really no way to stress this enough: setting spending limits is fundamental because as a beginner investor, it’s easy for you to identify a stock that you think is about to explode and then what happens? You put way more money into it than you can reasonably afford. The best way to prevent that is to set aside an investing budget (say, $100 a paycheck) and invest only $100 at a time. There are several reasons for that.

First off, taking baby steps will save you money. As a beginner, there’s a good chance you’re not too good at knowing exactly what investments are going to perform well (heck, even experienced investors don’t). If you’ve invested only small amounts of money at a time, you won’t find yourself in a situation where you’ve lost money that you couldn’t afford to lose. Plus, by investing small amounts of money over time, you’re actually using a time-tested investing technique called dollar-cost averaging which really lowers your risk in the long term. More on that in future posts.

Secondly, pacing yourself and going through small investments is an incredible learning opportunity, where you’ll gain valuable experience for future big investments. This is a very important step in learning how to start investing in the stock market. Skip it and there’s a good chance that you’ll jump blindly into a bad investment that will hurt you financially and from which you may take months, if not years, to recover.

The third and final tip is something that you will learn to develop over time. You might do all the research in the world and all the numbers add up and everything tells you that this is a good investment; yet a nagging voice tells you that something just doesn’t feel right. That’s your gut feeling. Listen to it. It can also go the other way around, where you have that stock and you just have the feeling that it’s going to do very well. The key here, of course, is moderation. If you’re acting on a hunch, make sure that you’re not betting the farm!

Learning how to invest is a long process, one that actually never ends. The greatest investors still have a thirst for knowledge to they can keep honing their skills and find new, profitable deals. They also know that things will not always go their way and that the key to being a successful investor is to win more often than you lose. That’s what you should also keep in mind as a beginner investor.

Investing 101: How And Where To Find Profitable Stocks

1. Get ready to start learning about investing. Go to your local library and rent out books about getting started in the stock market. Read about stocks, bonds, and other investment vehicles. Visit the beginner section of major financial sites like Yahoo Finance, Google Finance, CNN Money, and so on. If your budget allows it, take a seminar or a few classes on investing. The more you learn, the better prepared you’ll be.
2. Set financial goals for yourself that include investing but don’t stop there. Try and put together a comprehensive financial fitness plan that includes getting out of debt and increasing your income. As for your specific investing strategy, make sure you know what your risk tolerance is. This is the first thing that will dictate what your investment strategy is going to be.
3. Learn how to research individual stocks and also learn to keep on top of news that can affect a whole sector. Learn how to read stock charts, annual reports, quarterly reports, and other documents that publicly traded companies have to file with the SEC. Just remember to periodically step back and not let the abundance of information cloud your judgment, which brings you back to the importance of having a clear-cut strategy.
4. Invest in what you know. This is pretty much common sense advice. If you know an industry pretty well and know who the best performing companies are, it makes sense that you would invest there. Similarly, if you’re familiar with publicly traded companies in the area where you live that are consistently profitable, it might be a good idea to consider investing in their stocks.
5. Analyze the composition of the portfolio of successful mutual fund companies. If their portfolio is performing well, it’s because there are winning stocks in there. Pick them out and invest in them.
6. Diversify. This is also common sense advice. Concentration has its advantages, namely that you can get killer returns if a particular stock or sector gets hot. Conversely, if said stock or sector tanks, your entire investment fund can be wiped out. So as a rule, you want to avoid putting all your money in just one or two stocks, or for matter, just one or two industries. Sure, it will lower your potential returns, but at the same time, you’ll be better protected against market swings.
7. Save on commissions by using a discount brokerage to buy stocks. As long as you have the time to do your own investment research, are confident in your investing skills, and know that you have to take things gradually, you should be fine.
8. Buy stocks that you plan on holding on to for at least three to five years, if not more. The simplest way to make money in the stock market, as exemplified by Warren Buffet, is to find winning stocks and holding on to them. Period. So as long as a company’s fundamentals are sound, don’t give in to the temptation to dump the stock the minute it loses a few percentage points. Give it a chance to rise back; chances are it will, if it’s a sound and well-managed company.

Final word of advice: Don’t think that by investing all your money today, you will be a millionaire next month. Invest for the long term, stock market success doesn’t happen overnight.

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