Don’t be embarrassed if you’re not completely sure how stocks work. To break it down simply, a stock represents ownership in a company.
If you buy 100 shares of Facebook, for example, you actually own a portion of the company, just like founder Mark Zuckerberg. Although your share would be quite small because Facebook has roughly 2.38 billion shares outstanding, you would still participate in the same percentage of profit or loss as every other Facebook shareholder.
If you’ve never invested, all of the names and numbers you’re hearing in the news about stocks might seem like gibberish. Once you put in the time and do the research, however, you can unlock the meaning behind confusing stock terms and learn what it takes to get rich.
Types of Stocks You Can Invest In
The stock numbers you see in the news represent the price of one share of stock. If the Facebook stock goes from $100 per share to $102 per share, for example, every Facebook stock owner gets the same 2 percent gain in his share of its holdings. If the share price were to drop from $100 to $98, however, stock owners would find themselves with a 2 percent loss.
Investing in stocks involves taking a long-term approach to generating profits. Stocks can create profits for shareholders in one of three ways: via capital growth, income or a combination of the two.
Stocks provide capital growth when their share price rises in value. Let’s say you own 100 shares of a stock with a $100 share price, for a total investment of $10,000. If that stock rises to $150 per share, your original $10,000 investment will be worth $15,000, a 50 percent gain.
Some stocks aren’t expected to make big profit gains in the market but instead pay large dividends. A dividend is a regular payment to investors, typically made quarterly, that comes out of a company’s profits.
Income stocks are often available from firms that have stable earnings and dividends, like utility companies. An income stock might pay 5 percent or more in annual dividends to stockholders.
Some stocks share both growth and income characteristics, paying a dividend and offering a good potential for share price gains. These types of stocks typically come from older, well-known companies in reliable industries — think Apple — that might not generate a startup’s level of growth but still generate tremendous profits.
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Where to Buy Stocks
To begin investing in stocks, you’ll need a broker. This information might not answer all your basic investing questions, but it’s certainly a good place to start.
You might choose a full-service broker with physical branches, such as UBS, or an online broker, such as TD Ameritrade. To open an account, you’ll likely be required to provide the following personal information:
- Date of birth
- Social Security number
- Additional financial information, such as your bank name and account number
Before you begin investing, your broker will ask about your investment experience. This might range from going over what your financial objectives are to determining how much risk you are willing to accept.
Many online brokers, such as Fidelity, have both phone agents and brick-and-mortar locations where you can talk to live investment representatives. Many full-service brokers, like Merrill Lynch, allow you to buy stocks online as well. Here is a summary of the difference between online brokers and full-service brokers:
- Online investing is easy, efficient and inexpensive, but you have to know what you’re doing because there aren’t as many safeguards to prevent you from making bad trades.
- Online brokers are for do-it-yourselfers — you enter transaction online, but in-office or phone transactions might be available for additional fees.
- You’ll generally get low-cost trading, such as $4.95 per trade with Fidelity and $0 with Robinhood.
- You’ll have access to online services such as investment research and portfolio allocation tools.
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- Full-service brokers provide a wider range of services and more professional “hand holding” for nervous or inexperienced investors, but these services come at a higher cost.
- Full-service brokers typically charge a high fee per trade.
- You’ll be privy to a wide array of professional investment services, from trust and estate planning to insurance and retirement offerings.
- A full-service broker will typically provide you with a personal broker for one-on-one advice.
Once your account is open, you’ll have to fund it. Requirements vary by the broker, but you can typically make deposits via check, wire transfer or electronic transfer.
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How to Trade Stocks
The difference between an investor and a trader is that an investor has a long-term view and will ride out the short-term fluctuations of a stock, but a trader lives and dies by those short-term fluctuations.
If a stock rises quickly, a trader will bank the profit. If a stock begins to fall, a trader might immediately sell the stock to avoid further losses. The investment philosophies differ, but the steps to actually buy and sell remain the same.
If you’re working with a broker, you won’t be making an online investment by yourself. Instead, he will enter the trade for you. Tell your advisor the name of the stock and how much you want to buy, either in terms of a dollar amount or the number of shares. If you’re entering your own trades, you’ll have to do a bit more legwork.
How to Enter Stock Trades Online
Here are the steps you’ll need to take to enter stock trades online:
- Log in to your online account.
- Look up the symbol of the stock you want to purchase, which you can find online at any number of financial information sites.
- Enter the stock symbol and the number of shares you want to buy.
- Choose whether you want to enter a market order, which executes immediately, or a limit order, which specifies the maximum price you are willing to pay.
- Review your trade, including the total anticipated cost.
- Select the correct button to buy your stock, which can vary from company to company. Typically, the button will be labeled “buy,” “purchase” or “execute”.
- After you enter your order, wait for confirmation from your broker. If you work with a full-service broker, he will usually call you. If you choose an online broker, you’ll typically get confirmation via an online notification and an email.
You’ll follow the same steps if you trade stocks online as if you’re investing in them. When a stock has generated a quick profit, you’ll enter a “sell order.” You might also enter a sell order if a stock hasn’t moved as anticipated over a short period of time or if it has temporarily traded down.
Tips for How to Make Money in Stocks
Before you start investing your money in stocks, it’s important you do copious research to make the best investment decisions for your money. Here are a few tips on how to make a profit investing in stocks:
Create a Diversified Portfolio
Diversification refers to the addition of different types of investments to help mitigate the risk that comes with having all your eggs in one basket. You can diversify your portfolio by buying additional stocks that don’t necessarily trade in tandem. For example, if you own a tech stock like Facebook, you might add an oil company’s stock to diversify your holdings.
Another way to diversify your portfolio is to own different asset classes. For example, if you put money into a mutual fund or add exchange-traded funds, or ETFs, to your arsenal, it’s likely that portions of your overall portfolio will rise as others are falling.
Use Dollar-Cost Averaging
Even investment professionals with years of experience can’t tell you where the market will go in the next day, month or year. Even professional money managers struggle to predict the timing of when to get into the market and when to get out. Because of this, the best bet for beginners is to invest in the market regularly.
Financial services firms make this easier than ever with automatic transfers from your bank account to your investment account. By buying into the stock market regularly, you’ll automatically buy more shares when the market is low and fewer shares when the market is high, a process known as “dollar-cost averaging.” If nothing else, it’s a good way to avoid making investing mistakes you might regret.
Take Every Advantage
Investing in stocks takes research and dedication, but it can be a great way generate profits and save for long-term goals like retirement. Balancing your stock investments with other assets can help reduce the volatility of your portfolio and keep you invested.
Automating your investing and dollar-cost averaging can help ensure you’re saving regularly and can protect you from trying to time the market. The process of actually buying stocks is straightforward but do your research first. If you’re still scared of investing in the stock market, talk to an investment advisor.
When investing in stocks, consider which type of stock best suits your investment strategy. Before you buy an individual stock, research the reasons why the share price might go up or down. Just because a company has a name you know or creates a product you like doesn’t mean that the stock will earn you a fortune.