Investing in stocks can help you build wealth over time. Here is a guide to help you understand investments in stocks, better.
What Are Stocks?
Stocks are equity investments that make you the part-owner of the company when you purchase them. Companies issue stock to raise funds.
Types of Stocks
Stocks are mainly of two types:
Common: Owning common stock entitles the stockholder to a proportionate share of a company’s profits or losses. People are generally referring to common stock when they discuss stocks.
Preferred: Owners of preferred stock get first preference in receiving dividends (quarterly payments sent to the shareholders by the company) and getting paid if the company files for bankruptcy. The price of these stocks doesn’t fluctuate like that of common stocks.
Why Stock Prices Fluctuate
The stock market can be compared to an auction. Individuals, governments, or corporations can be buyers and sellers. When the buyers are more than sellers, the stock prices go up. When the sellers are more than buyers, the prices reduce.
Investors’ reactions to a company’s performance determine how a stock price fluctuates. If a company is performing well, more people want to buy its stock, increasing the price. If the company underperforms, the opposite happens.
Common Terms Associated with Investment in Stocks
Below are some common terms you should be familiar with if you plan to invest in stocks:
Stock Market Capitalization: Stock market capitalization (cap) is the share price multiplied by the total outstanding shares. For instance, if a company has 1 million outstanding shares worth $50 each, its market cap would be $50 million.
Market cap is a better indicator of a stock’s worthiness than its share price as it helps you evaluate a company compared to other companies operating in the same industry. Companies are generally classified based on their market cap—small-cap ($300 million to $2 billion), mid-cap (between $2 billion and $10 billion), and large-cap ($10 billion or higher).
Stock Splits: A company may divide the shares it currently has to increase its total shares. This process, typically done in a 2-to-1 ratio, is called a stock split. Stock splits occur when prices are increasing in a way that is disadvantageous to small investors.
You can buy stocks using an investment app or directly by using a brokerage account. Just as it’s important to buy stocks at the right time, so is selling them.