The Basics of Investment in Stock Market

Investment in stock market is not a game that everyone can play, as it requires both time and experience. However, in recent years, thanks to the popularity of personal finance blogs and sites like the Motley Fool and MarketWatch, stock investing has become more mainstream.

Some options for investing in stocks that exist currently offer even newcomers the chance to invest their money in them and hope for a great return. While this is exciting for many people, it also presents a new set of problems.

A stock is a sort of investment that reflects a portion of a company’s ownership. Stocks are purchased by investors who believe they will increase in value over time.

When you start to learn about the investment in the stock market, it can be all a bit confusing! There’s a lot of jargon and not-so-clear information out there. But don’t worry! The aim of this blog is to teach you the basics of stock investing. It’s written from the point of view of a beginner, so you’ll understand how it all works, or at least what happens behind the scenes.

I’ll try my best to explain things in layman’s terms where possible and make sure everything is straightforward.

In this article, we’ll be discussing:


What is Stocks | Definition

Based on IRS, Stocks are shares in a corporation that offer you ownership. The corporation initially sells them in order to raise funds to construct or expand its operations. After the shares have been issued, they are traded on a stock exchange such as the New York Stock Exchange or the Nasdaq National Market, where investors can buy and sell.

investment in stock market data presentation

Investors buy stocks from companies they believe will appreciate in value. If this occurs, the value of the company’s stock rises as well. After then, the stock can be sold for a profit.

Issuing stock is a way for businesses to generate funds to expand and invest in their operations. Stocks are a tool for investors to expand their money.

You are referred to as a shareholder if you possess shares in a firm and partake in its profits. A stock market exchange, such as the New York Stock Exchange, is where public businesses sell their stock. Investors can then use stockbrokers to buy and sell these shares among themselves.

The stock exchanges keep track of the supply and demand for each company’s shares, which has a direct impact on the price of the stock.

Want to learn more? Read our full guide here on how to invest in stocks.


The Appeal Of Stocks

Investors buy stocks for several reasons:

  • To build the value of their investment accounts as stocks increase in value
  • To make money by being able to sell the stock at a higher price than they paid
  • To share in the profits of the company by collecting dividends, or a share of the company’s earnings

Most stocks are common stocks, which make no performance guarantees but can increase in value. Preferred stocks, on the other hand, guarantee the dividend you will receive. But that amount does not increase if the company has higher earnings and the share price tends to change more slowly.

The majority of investors possess common stock in a publicly-traded corporation. Dividends on common stock are possible, but they are not guaranteed, and the amount of the payout is not fixed.

Preferred stocks typically pay fixed dividends, ensuring that shareholders receive a predictable amount of income each year.

Preferred stockholders also get first dividends on the company’s earnings: excess income allocated as dividends goes to preferred stockholders first, and if the company goes bankrupt, preferred stockholders get any asset liquidation proceeds before common stockholders. (Hence, the word “preferred”)

Here’s a 5-minute video that will help you differentiate common stock from preferred stock when investing:


How Do You Make Money In Stocks?

Stocks are riskier than other investments, but they also have a bigger potential for profit. There are two basic ways for stock investors to make money:

  1. By way of dividends. A dividend is a distribution of a portion of a company’s earnings to a class of shareholders chosen by the board of directors of the firm. Dividends are normally paid in cash, but they can also be in the form of stock or any other asset. Dividend income is usually defined as a company’s taxable income distributed to its shareholders.

    Dividends are payments made to shareholders on a regular basis. Not all stocks pay dividends, but those that do are usually paid out every three months.
  1. If the price of a stock rises during their ownership, and they sell it at a higher price than they paid for it.

Individual stocks can be purchased using an online broker. A brokerage account is opened in the same way that a bank account is opened. Because online brokers charge different commissions for stock trading, it’s necessary to research.


Investment in Stock Market | Important Things To Consider

investment in stock market - graphs and diagrams

#1. Stock Investing takes time.

Each stock you buy should be thoroughly researched, including a deep dive into the company’s bones and financials. Many investors prefer to invest in equities through equity mutual funds, index funds, and exchange-traded funds (ETFs) to save time.

These let you buy a large number of stocks in one transaction, providing rapid diversification and decreasing the amount of labor required to invest.

#2. Invest time to do some careful research

Sit down and carefully study your complete financial condition before making any investment decisions, especially if you’ve never established a financial plan before. Identifying your goals, either on your own or with the assistance of a financial advisor, is the first step to effective investment.

#3. Risk Management is a MUST

Just like with crypto, stocks carry some level of risk. How much money are you willing and able to invest without putting yourself in financial jeopardy? Be sure to check your risk tolerance, since it will influence the stocks you choose.

If you want to invest in stocks, you should be aware that you could lose part or all of your money. The potential for a higher investment return is the reward for taking on risk.

Read More: Crypto Vs Stock Market: Which Should You Invest In?


That’s it, guys! I hope you enjoyed this informative article. If you have questions, feel free to post a comment down below.

While I’ve traded stocks in the past, I found day trading crypto more profitable to me. So if you’d like to learn more about it, just click on the link below and I’ll walk you through the world of day trading:

3 thoughts on “The Basics of Investment in Stock Market”

  1. Is buying and selling stock same as buying and selling shares? I sometimes find this two confusing. I  researched  about buying shares in big companies in January but I found somethings difficult to understand. Some shares are expensive and some companies also offer fractional shares.
    With the insight on this article I will get back to my research. Thank you for sharing.

    Reply
    • Hi, Bethel. I appreciate that question! Both words are used interchangeably to refer to financial equities, specifically, securities that establish a sort of ownership in a company.  “Shares” are just pieces of company ownership. “Stock” is a word used to describe the entire collection of existing shares.

      Reply
  2. I have always wondered what the difference is between common stocks and preferred stocks,  and after reading this article, I have a much better understanding of what is involved with each one.

    I only started investing in the stock market about 3 years ago and have opted for mainly exchange traded funds and mutual funds. I felt it was a better way to diversify my investments. I will continue with my research on which stocks and shares I might want to add. 

    Reply

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