When you buy stock, you are buying a share in the ownership of a company. This means you have a claim to the company’s assets and, depending on the stock, may be entitled to a percentage of the company’s earnings. The more stock you acquire the larger your ownership percentage.
You will also be entitled to any voting rights attached when you buy stock. Basically, you will be allowed one vote per share to elect the board of directors at the company’s annual meeting. These are the people responsible for making major company decisions like dividend policies, hiring and firing of executives and executive compensation.
There are basically two ways you can make money with stocks. You can receive dividend payments and you can sell stock that has appreciated in value.
A dividend is an income distribution by a corporation to its shareholders. These are usually made quarterly. Some companies pay dividends while others do not.
Typically young companies that are growing quickly tend to reinvest their profits back into the company and therefore, choose not to pay dividends.
Stockholders of these companies usually make their money by buying stock when the companies are new and their stock prices are lower.
These companies are a higher risk because they don’t have a proven track record. If the companies take off and become successful, investors sell their stock for far more than they paid, sometimes realizing a substantial profit.
Older, more established companies often pay dividends simply because they aren’t growing as quickly and don’t need as much money to reinvest back into the company. However, dividends are based on profit, so the more profitable the company, the higher the dividends.
There’s no guarantee you will make money when you buy stock. If the company performs poorly and stock prices go lower than what you paid, you have two options. You can sell the stock and take a loss or you can hold on and hope it goes back up.
The only reason you would want to sell a stock on the way down is if you think there is no chance for it to recover. It’s better to lose a little money than a lot. However, all companies go through the ebb and flow of the economy.
If the company has been strong in the past, is well established and has a record of accurate profitability projections, it’s usually better to just hold on. Stock prices usually go back up eventually.
Since stocks do involve a certain degree of risk, they tend to offer greater rewards when things go well. They should be a part of your portfolio. However, the sooner you plan to retire and need your money, the smaller percentage you should invest in stocks.
Bonds tend to be a safer option and should make up a larger portion of your portfolio the closer you are to retirement. Conversely, younger investors can afford to take a bigger risk and include a higher percentage of stocks because they have more time to recover if the market changes for the worse.
It’s very easy to buy stock. You simply set up a brokerage account and depending on what type of service you choose, can get started right away. However, it’s extremely important to do thorough stock research before you buy.
You’ll need to look for things like the company's past financial performance, it's management, products or services it sells and how the stock has been valued in the past.
Sites like Morningstar can provide you with updated information on stocks and other investment options to help with your stock research.
Unless you have an enormous amount of time and talent for picking trends, it’s not likely you’ll be able to outsmart the experts and consistently pick the next big thing.
So it’s best to invest in what you know. If you see a company who's filling a need in an under-served market or you notice a company doing particularly well, these may good places to start your research.From Buy Stock to Investing Money