Investing stocks can help build wealth over the long-term but its not without risks. Learn the basics of stock investing, stock analysis, and strategies to build your stock portfolio.
To directly invest in stocks, you’ll need a brokerage account. Determine how much risk you’re willing to take and your investing strategy. Consider the time frame, whether you’re looking for price appreciation or dividends and how these stocks fit in your portfolio. You can also invest in stocks through mutual funds, ETFs and 401(k) plans. Investors with higher risk appetites can consider derivatives or day trading strategies.
Stocks represent ownership in a publicly-traded company and are traded on stock exchanges. When you buy shares of a stock, you become a shareholder and receive proportional ownership in the company and its profits. Shareholders benefit from an increase in stock price, dividends or other perks. You may also get voting rights, depending on the type of shares you buy.
Stock prices are determined by demand and supply on the exchanges. Market sentiment based on economic data, happenings in a certain industry, or company-specific news can impact stock prices. Stock markets or stock indexes consist of publicly traded companies. Price swings in large companies or many companies on an index can move the entire market down.
A short squeeze can occur when short-seller bets go wrong. Shorting means selling a stock that you don’t own yet at the current price, buying it once the price falls to complete the sale, and profiting from the difference. If the stock price moves higher instead, your short loses money. You now have to buy the stock at the higher price to cover the sale. When many investors do that, it creates more demand for the stock taking its price higher.
Stocks of companies trade on stock exchanges. To buy a stock, you need to open a brokerage account. You can place your buy or sell orders for stocks through this account. You can also buy stocks without a broker through direct stock plans or DRIP investing. You could also own stocks by investing in mutual funds, ETFs or through your 401(k) plan, but with these options you may not be able to choose specific stocks to buy.
Investing in stocks in general carries some risks but some stocks can be more volatile than others. The first step is to evaluate your risk tolerance and how much money you can afford to lose. Market cap is often treated as a benchmark for stability but don’t rely on that alone. Research the company’s financials and business to assess how the stock fits into your investing strategy.
Penny stocks are often issued by small companies called microcaps. Microcaps are companies with market capitalization less than $250 or $300 million. Penny stocks typically have stock prices of less than $5. Investing in penny stocks can be speculative, highly volatile and risky. Such stocks, typically, have less stringent disclosure requirements and low trading volume.
Typically, individual investors are recommended to buy and hold stocks for a long time. Trying to time the market or panic-selling during a falling market are often mistakes that investors make. But if the stock no longer aligns with your investment strategy, if the company isn’t making sense in your portfolio or if you need to sell your holding for any other reason, you should do so with a plan.
Shares of stock represent a fractional ownership interest of the company that issued them. By owning a share or multiple shares, investors may receive returns through capital appreciation if the stock’s price rises or from dividend payouts. They also gain the ability to influence the company through their votes as a shareholder.
Buy and hold is an investment strategy in which the investor buys stocks and holds them for the long term. In other words, this method is about riding out any ups and downs in stock you own, rather than trying to swing trade the price movement.
A stock ticker symbol is a short chain of letters that serves as a firm's unique identifier in the trade market. Companies issue stocks or bonds to raise funds, and if their issues trade on stock markets, they need to have a special symbol to be found by people quickly.
A bear market occurs when the price of an investment falls at least 20% from its high.
A stock market correction is when the market falls 10% from its 52-week high. In a correction, the 10% decline will manifest over days, weeks, or months. In a stock market crash, the 10% price drop occurs in just one day. These crashes can lead to a bear market, which is when the market falls another 10% for a total decline of 20% or more.
A price-to-earnings ratio, or P/E ratio, is the measure of a company's stock price in relation to its earnings. When trying to decide whether to invest in a certain stock, using the P/E can help you explore the stock's future direction.
Blue-chip is a term that is used regarding a company's financial stability and reputation. The name comes from the game of poker—blue chips have the highest value.
A stock split is when a company lowers the price of its stock by splitting each existing share into more than one share. Because the new price of the shares correlates to the new number of shares, the value of the shareholders' stock doesn't change and neither does the company's market capitalization.
Cyclical stocks are those that ebb and flow with the economy. Profits from these stocks can be significant when the economy surges, but losses can be substantial during a downturn. This is in contrast with noncyclical stocks, which are relatively stable regardless of the state of the economy.
Dividends are a form of profit on investments. They are paid out of company earnings directly to shareholders, who can cash them out or reinvest them. Typically, dividends are taxable to the shareholder who receives them.
A brokerage account is a type of taxable investment account that can be opened with a brokerage firm. The account holder can order trades, such as buying or selling stocks, and those orders are executed by the brokerage firm.
Earnings per share (EPS) is the most important metric to use when you're analyzing a stock. You can calculate a company's EPS using this formula: (Net Income - Dividends on Preferred Stock) ÷ Average Outstanding Shares.