top of page

Stocks

What are Stocks?

When someone mentions investing, the first thing that comes to mind for many is stocks.

 

Stocks represent shares in the ownership of a company, including a claim on the company's earnings and assets. Companies issue them in initial public offerings to raise capital and grow their business. 

Benefits of Buying Stocks

  • People buy stocks with the hope that the company does well and stock prices go up, allowing them to sell it at a profit. 

  • Some stocks pay dividends (a portion of company profits given to shareholders), providing regular income in addition to any increase in the stock's value.

  • Stocks grant you partial ownership and voting rights, although you would need a lot to have significant influence. 

Risks of Buying Stocks

  • If the company does poorly, the stock price will reflect that, forcing you to sell them at a lower price. You can be making a loss. 

  • General economic conditions, like a recession, will affect every company and the demand for stocks. 

  • Markets tend to be volatile. Prices change every minute! Stocks tend to appreciate in the long run, but in the short run, you will be facing a lot of risks. 

  • You might get taxed for capital gains or for receiving dividends, which can reduce the benefits of investments. 

image.png
image.png
Common Stocks and Preferred Stocks

There are various kinds of stocks, which will be the topic of a future article. However, at its core, stocks are either common or preferred. 

 

Common stocks, or ordinary shares, entitle investors to dividends and voting rights. If a company dissolves, they have rights to parts of the company’s liquidated assets. Company founders and employees typically receive this type of stock. 

 

Preferred stocks grant shareholders priority in receiving dividends and assets during dissolvance. However, they don’t carry voting rights. 

 

Note that companies don’t have to pay dividends. They do so to incentivize investment and flex their performance, but they can suspend payments at any time and often don’t need to repay it. It’s all based on the board’s decision. 

image.png
How Do You Buy Stocks?

The process is very simple: 

  1. First, open a brokerage account (AKA investment account). Note that there are different types of accounts, like a standard account or individual retirement account (IRA) that have different traits.

    1. Complete an account application

    2. Provide proof of identification 

    3. Decide whether you want to fund the account via mailing checks or electronic transfers.

  2. Add money to the account.

  3. Go forth and buy! There are various stock exchanges, like the New York Stock Exchange (NYSE) and NASDAQ, that offer different stocks. 

image.png
Tips for Buying Stocks

Investment tips will be the topic of a separate article, but here are some things to keep in mind:

  • Conduct thorough research on the company. 

    • Read financial statements.

    • Understand company fundamentals

    • Assess industry trends

    • Consider analyst ratings. 

    • Consider key metrics like P/E ratios, earnings per share (EPS), and dividend yield.

  • Professional investors construct models to assist investing, though it will be difficult for the common folk to do the same. 

  • DIVERSIFY. Don’t keep all your eggs in one basket.

    • Look at different companies. 

    • Look at different industries.

    • Consider various asset types other than stocks, like bonds.

image.png
TL;DR

  • Stocks are shares in a company that gives you a claim on its earnings and assets. Companies issue them to raise capital.

  • Buying stocks can be beneficial as they may increase in value, allowing you to sell at a profit. Some stocks also pay dividends, providing regular income, and they offer partial ownership and voting rights.

  • Risks include potential drops in stock prices due to poor company performance or economic conditions. Market volatility and taxes on gains or dividends also pose risks.

  • There are common stocks and preferred stocks. Common stocks provide dividends and voting rights, while preferred stocks offer priority for dividends and assets but lack voting rights.

  • To buy stocks, you need to open a brokerage account, complete the application, fund the account, and then purchase stocks through various exchanges.

  • Important tips include researching companies, understanding financial metrics, diversifying your investments, and considering other assets beyond stocks.

bottom of page