Investing in stocks is the wisest move towards creating wealth. It is the most effective way to grow your capital over time. Most of the world’s wealthiest people owned a large block of shares in a public or private corporation.
Stock, also known as equity, is the share in the ownership of a company. In other words, you become a part-owner of a company when you purchase their shares. For example, if you purchase shares in Apple Inc., you automatically become a part-owner of the company.
Companies issue stock to raise capital to grow their business and as an investment opportunity for investors to share ownership.
Investing in stocks is a way to grow investor money over time. When you own stock in a company, you are called a shareholder because you share its profits. Shareholders can vote on certain business decisions of the corporation, and they also receive annual reports of the company’s performance.
When a company decides to sell a stake in their company, they mainly do it because they wish to expand their brand, launch new products, or pay off debt.
Introducing the stake to the public to sell for the first time is called an Initial Public Offering (IPO). After the IPO, the shareholder can decide to resell the stock or shares on the stock market for a higher or lower price. The stock market is where buyers and sellers meet to exchange their shares in a company.
Reasons why the investors buy shares in a company.
For investors to acquire capital gain on their original investment, they must sell their shares at a higher price. So, Investors purchase into companies hoping that the value of the company will grow over time. In addition to this, some company that makes profits may distribute a portion of the profit to its shareholders in the form of dividends.
Dividends are profits paid out to its shareholders quarterly or annually. They may also be distributed in the form of share repurchases, which help drive up the price of the stock, making the shareholders money, or they may be set aside in order to be used at a later date to grow the company and increase the value of the shareholders’ stock.
Not all companies pay dividends to their shareholders. A company uses the profit to buy back shares to grow the company’s value, which in return makes the investors benefit.
A major key to investing success is the principle of compound interest. Investors can make a high capital gain if they reinvest when a stock makes them money. You can buy more stocks in an ongoing process, and if you make a good investment, the net result will be that your money grows exponentially over time.
The goal is to buy a company when the price is low so that you can sell it back at a higher value. An investor can buy and sell shares in any public company at any time by registering with a Broker.
The simplest way to gain success in this market is by buying a stock and holding on to the company for an extended period of time until it grows in value to a point where you are comfortable selling it for a profit. If the company offers dividends, you will accumulate profits along the way without selling the shares.
There are two types of stocks, common and preferred.
Common stock has a high return in capital gain and pays dividends. Their values depend on when they are traded (buy/sell). Common stock owners can vote on a corporation’s affairs, such as the board of directors, takeovers, mergers, and acquisitions. On the other hand, preferred stocks have a low capital gain, but they get paid dividends first.
Preferred stocks have a higher claim over the company’s assets and profits than common stockholders. They have more certainty of getting their investment returns. For example, if a company should go bankrupt, common stock owners would be the last to get paid out after the company bondholders and preferred stockholders.
However, Common stock is what most companies only have. Preferred stocks are what some companies have in addition to common stocks.
Stocks are broken down into categories to meet the needs of the economy and shareholders. They can be grouped by industry sector as listed below;
Stocks can also be grouped based on potential and value. Growth stocks are anticipated to grow at a high rate in the market. Shares generating a return on equity of greater than 15% are generally classified as growth stocks. Such stocks generally pay no dividends, as these companies reinvest most of their earnings back in the company to accelerate growth in the short term. When investors invest in growth stocks, they anticipate earning money through capital gains when they eventually sell their shares in the future.
Value stocks don’t rise much but pay dividends. These stocks tend to be large companies that experience investors see as unfavorable because the price is undervalued for what the company actually delivers. A value stock is typically more likely to have a higher long-term return than a growth stock because of the underlying risk. An example of a Value stock is Bank of America Corporation.
Blue-chip stocks are well-valued companies that are nationally recognized and well-established. Blue chips generally sell high-quality, widely accepted products and services. These companies perform well in adverse economic conditions, which helps to contribute to their long record of stable and reliable growth. They pay dividends and are considered a safer investment than growth or value stocks. They also are called income stocks. An example of a blue-chip stock is Coca-Cola.
Once you learn the basic knowledge and understand the fundamentals of investing, the next step is to choose the companies you wish to buy. The aim is to choose companies that will bring you success. This requires you to do excessive research. <