It's no secret that investing in stocks can be an alluring way to build wealth. And if you're a beginner investor, we're here to reassure you that it isn't as difficult as it seems. All you need to do to get started is open an online investment account.
Brokerage accounts work similar to bank accounts, except they're used to buy and sell securities. You choose a provider and open the account online, move money into it, and you're ready to buy stocks in a few clicks. You can even use a brokerage to gift stock someone to else, though you'll need their account information to initiate the transfer.
There are other countless strategies when it comes to picking stocks. Another way to think about evaluating what to buy is to design your portfolio with an investing strategy in mind. For example, if you believe stocks ought to pay you a steady stream of income, you might want to explore dividend stocks. If you have a high tolerance for risk and are curious about early-stage growth companies, consider growth stocks. On the other hand, filling your portfolio with value stocks means finding companies that are underpriced, with the idea that they will grow and outperform the overall stock market over time.
That's why many financial advisors recommend that beginners get into the stock market by buying mutual funds or ETFs, which allow you to buy a \"basket\" of stocks at a low cost. Index funds, in particular, can be the foundation of a well-diversified portfolio.
If the share prices of stocks you're interested in are financially out of reach, you can also explore fractional shares. Fractional shares allow you to buy fractions, or parts of a stock. If, for example, a single share is $500, you can buy $50 worth of the stock, giving you a fraction worth 10% of a share. Nowadays, many online brokers from Fidelity to Robinhood offer fractional shares.
As you think about when you might want to sell your shares, keep in mind that stocks carry quite a bit of risk, and following a buy-and-hold strategy will help you safeguard against volatility so you can ultimately benefit from the long-term profits.
You're never truly \"done\" building your portfolio because it's an ongoing process that becomes more efficient as you gain experience and refine your goals. After some time, reevaluate your holdings: Are they diversified enough to guard against risk Might your portfolio be too heavily focused in one industry
Keep up with the progress of your investments, but don't place too much weight on daily fluctuations because, as previously mentioned, it's best to think long-term when buying stocks. Periodically ask yourself or your financial advisor whether you're on track to meet your goals. If you aren't, it might be time to tweak your portfolio allocation.
The best time to sell your stocks is when you need the money, and this depends on your predefined timeline and whether your investment goals are short or long-term. If you're considering selling a stock, remember why you bought it to begin with and consider whether it still aligns with your goals.
To invest, you don't have to buy individual shares of stocks or even fractional shares. You can diversify by purchasing assets such as index funds, which are funds that include various stocks, bonds, and other assets. Index funds can help diversify your portfolio.
You could also look into alternative investments, such as real estate or commodities. However, these are a bit more complex than buying stocks or bonds, so be sure you speak with a professional before investing in alternative assets.
The first step in the investing process is opening a brokerage account, and there are a few key considerations when curating a portfolio, like identifying your timeline and risk tolerance, making a conscious effort to diversify, and deciding what type of stocks are most appropriate for meeting your goals.
1. Dividends. When companies are profitable, they can choose to distribute some of those earnings to shareholders by paying a dividend. You can either take the dividends in cash or reinvest them to purchase more shares in the company. Investors seeking predictable income may turn to stocks that pay dividends. Stocks that pay a higher-than-average dividend are called \"income stocks.\"
The performance of an individual stock is also affected by what's happening in the stock market in general, which is in turn affected by the economy as a whole. For example, if interest rates go up, some investors might sell off stock and use that money to buy bonds. If many investors feel the same way, the stock market as a whole is likely to drop in value, which in turn may affect the value of the investments you hold. Other factors influence market performance, such as political uncertainty at home or abroad, energy or weather problems, or soaring corporate profits.
Some companies also issue preferred stock, which usually guarantees a fixed dividend payment similar to the coupon on a bond. This might make preferred stocks attractive to people looking for income. Dividends on preferred stock are paid out before dividends on common stock.
Industry experts often group stocks into categories, sometimes called subclasses. Each subclass has its own characteristics and is subject to specific external pressures that affect the performance of the stocks within that subclass at any given time.
You'll frequently hear companies referred to as large-cap, mid-cap or small-cap. These descriptors refer to market capitalization, also known as market cap and sometimes shortened to just capitalization. Market cap is one measure of a company's size. More specifically, it's the dollar value of the company, calculated by multiplying the number of outstanding shares by the current market price.
Stocks can also be subdivided into defensive and cyclical stocks, depending on the way their profits, and their stock prices, tend to respond to the relative strength or weakness of the economy as a whole.
Defensive stocks are in industries that offer products and services that people need, regardless of how well the overall economy is doing. For example, most people, even in hard times, will continue filling their medical prescriptions, using electricity and buying groceries. The continuing demand for these necessities can keep certain industries strong even during a weak economic cycle.
In contrast, some industries, such as travel and luxury goods, are very sensitive to economic ups and downs. The stock of companies in these industries, known as cyclicals, might suffer decreased profits and tend to lose market value in times of economic hardship as people try to cut down on unnecessary expenses. But their share prices can rebound sharply when the economy gains strength, people have more discretionary income to spend and their profits rise enough to create renewed investor interest. Thus, their stock price generally tracks with economic cycles.
Growth stocks, as the name implies, are issued by companies that are expanding, sometimes quite quickly, but in other cases over a longer period of time. Typically, these are young companies in fairly new industries that are rapidly expanding.
Value stocks, in contrast, are investments selling at what seem to be low prices given their history and market share. If you buy a value stock, it's because you believe that it's worth more than its current price. Of course, it's also possible that investors are avoiding a company and its stock for good reasons and that the price is a fairer reflection of its value than you think.
You can place buy and sell orders for stocks online, through a mobile app, or by speaking with your registered investment professional in-person or over the phone. If you do trade online or through an app, it's important to be wary of trading too much, simply because it's so easy to place the trade. You should consider your decisions carefully, taking into account fees and potential tax consequences, as well as the impact on the balance of assets in your portfolio, before you place an order.
When you buy stocks on margin, you borrow part of the cost of the investment from your brokerage firm in the hopes of increasing your potential returns, which can magnify both your gains and your losses. For this reason, it's important to understand how margin accounts work and the risks associated with buying stocks and other securities on margin. Learn more about margin accounts.
Because short selling is, in essence, the sale of stocks you don't own, there are strict margin requirements associated with this strategy, and you must set up a margin account to conduct these transactions. The margin money is used as collateral for the short sale, helping to ensure that the borrowed shares will be returned to the lender down the road.
Sometimes an entire industry might be in the midst of an exciting period of innovation and expansion and becomes popular with investors. Other times that same industry could be stagnant and have little investor appeal. Like the stock market as a whole, sectors, industries and individual companies tend to go through cycles, providing strong performance in some periods and disappointing performance in others.
This is the risk that a company's business is going the way of the dinosaur. Very few businesses live to be 100, and none of those reach that ripe age by keeping to the same business processes they started with. The biggest obsolescence risk is that someone will find a way to make a similar product at a cheaper price.
Microcap securities, sometimes referred to as penny stocks, include low-priced securities issued by small companies with low market capitalization. These securities are primarily traded on the over-the-counter (OTC) market. While microcap companies can be real businesses developing or offering products or services, the microcap sector has a long history of bad actors engaging in price manipulation and other fraud. However, even in the absence of fraud, microcap stocks can present higher risks than the stock of larger companies. This is largely because relatively little information is available about microcap companies compared with larger companies that list their securities on national exchanges. 59ce067264