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Stock investing - Traditional, yet still profitable
Cashbazar.com When you buy a stock, you’re actually purchasing a small piece of a company, which entitles you at minimum to a share of the company’s assets and earnings. With more stock comes more of a claim, and eventually more control. Stock investing is really becoming a partial owner. And with most stocks, you also gain voting rights in the company’s board equivalent to the size of your share, though most small stockholders do not exercise this right. This is because most of the day to day work of running the business is entrusted to the company management and an elected board of directors. Large investors often have enough power to force off members of management, but smaller investors rarely have that much influence. Stock investing mostly purchases you a share in the earnings of the company, and the stocks themselves have intrinsic value. They do not, however, leave you liable to all a company’s debts. If a company experiences loss, the only loss you’ll have is a loss in the value of your stock holdings; you will never have to pay more cash to settle debts. Profits may be paid to stockholders in the forms of dividends. In general, though, the real value you purchase when stock investing is the partial ownership of the company, with the hopes that the company’s value will increase. There is a significant difference between stocks and bonds. While stocks are part ownership of a company, bonds are loans, with the expectation of eventually being purchased back with interest. Bonds do not increase in value at the pace of stocks, and you are not entitled to any dividends. However, if the company goes bankrupt, you will be paid back the value of your bond before stockholders receive any cash for their stock holdings. This means that stock investing carries more inherent risk, and more inherent reward, than bonds investing. Though there is significant risk in stock investing, there is also a greater return on your investment (ROI) than with other forms of investing. Historically, stocks held long term have an average return of ten to twelve percent. IPOs An IPO is an initial public offering of stock. Though IPOs often generate a lot of buzz and get a lot of attention, they are not usually a better investment than any other type of stock. For instance, lots of people dream of getting IPO stocks on the next Microsoft – but they’re more likely to get the IPO stock of the next Billy Beer. Losses on unproven companies are more common than gains. So why the stock investing buzz on IPOs? IPOs do have one advantage: they are very limited in quantity. Because limited quantity drives price up, IPOs increase in price rapidly after they’ve first been issued. However, they’re also very volatile. If you don’t choose just the right time to sell, you can lose your investment. If you’re just starting stock investing, it’s probably better to avoid IPOs except in the case of already-proven companies like Google, who are just now going public. Trading Stocks Though everyone’s seen the chaotic pictures of stock exchange floors, most stocks today are traded virtually in the same stock exchanges. Stock markets are really a sort of clearinghouse, where buyers and sellers can meet. Stocks sold in this way do not involve the company, but rather people who own stock who are selling it. In order to buy or sell on a stock exchange, traders need to be listed with the exchange; if you’re not listed, you will need to work through a listed trader. Buyers and sellers are brought together by a specialist, and stock prices are determined by auction, with the seller selecting the lowest price they’ll sell at, and then receiving the highest price bid. Other stock exchange models work somewhat differently, but the goal is always the same: bringing together the buyer and the seller, and getting the best possible price for both parties. Penny Stocks Because of the very cheap prices and the fact that it’s so cheap to get into the market, you might be considering penny stocks for your stock investing. But penny stocks, and their brother financial products junk bonds, are more of a risk than most beginning investors should take. These are marginal companies, with little chance of succeeding, and should be avoided by anyone who isn’t well versed in identifying good investment opportunities. Stock Value When you first start stock investing, you may think that the value of a stock indicates the value of a company. This is not at all true; it indicates the value traders are placing on the stock itself, a very different thing. It incorporates expected future value as well as present stability. Overpriced stocks, like the tech stocks that abounded in the 1990s, may be part of a stock market bubble; when you purchase stocks, try to buy the ones that reflect the real value of the company. You can determine this by looking at the current earnings of the company, compared with the potential future earnings. High future earnings indicate a stock that’s worth more than the company, while stable or lower future earnings are a stock that should be avoided. Figuring out the true value of a stock is the real art in stock investing.
If you’re good at this, you’ll probably make money buying
and trading stocks. Probably.
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