Have you been in a gathering and they were talking about owning stocks and you were wondering what they were talking about?

Or maybe you were researching investment opportunities and came across stocks but had no idea what they mean; this article will hopefully address all your questions.

Let us start from the beginning.

What are Stocks?

A stock, which is also referred to as Equity, is a type of financial security that symbolizes the ownership of a part of a corporation. In essence, the owner of such stock is entitled to a certain percent of the corporation’s assets and profits equivalent to how much stock the owner possesses. Units of stock are referred to as shares.

To put it simply, stocks are a means to build wealth. They are a means of investment that means you own a share in the company that issued the stock.

Stock is the medium through which an average man invests in some of the most successful companies in the world. On the flip side, stocks are a way to raise money to fund growth, products, and other initiatives by companies.

Depending on the percentage of stocks you possess as an investor, you get a right to vote at crucial stakeholder’s meetings if you choose to exercise it but the main reason that investors own stock is to receive a return on their investment and this can be in two forms:

The average annual stock market return that has been consistent for a while is 10% but it sometimes falls to 7% or 8% due to inflation. Some companies still fall lesser than this average percent, some pay higher while some do not pay at all.

That is why it is advisable that an investor should not buy stocks in just one company, rather, build a well-rounded portfolio that can boast of stocks in many companies across varying industries and geographical locations.

As earlier mentioned, companies sell shares to raise money for various reasons including funding new products or product lines, expanding operations to new frontiers, investing in growth, or to pay off debt.

One of the processes through which a company issues its stock is known as Initial Public Offering (IPO) and once a company’s stock is released to the market, it can be purchased and sold among existing and new investors.

In most cases, if you decide to buy a stock, you will most likely be buying it from another investor who is looking into selling and not directly from the company itself.

Likewise, when you want to sell your share of stock, it will be bought by another investor who is willing to purchase.

In the stock market, trades (stock exchange) are conducted in two ways; either a Broker represents you as an investor or you make use of online Stockbrokers (a platform that connects the buyers and sellers of stocks, thereby effecting exchanges) As an investor, you’ll need a brokerage account to buy stocks.

Remember that while stocks generally have a history of high returns, they also come with their fair share of risks, that is, your stock may go down in value at a given time.

This can come to be when stock prices fluctuate for reasons such as general market volatility or specific internal events such as a product recall.

Essentially, the goal of owning stocks is for the value of the company and its stock to increase while you are an investor.

Main Types of Stocks Every Investor Should Know

When a company sells shares of stock to the public, those shares are issued as one of two main types of stocks: Common stock or Preferred stock. Also, stocks are classified by company size, industry, company style, and location.

1. Common Stock: Gives the owners the right to vote at shareholder meetings and gives them the right to receive dividends.

2. Preferred Stock: Doesn’t give the investors the right to vote but they receive dividend payments before the common investors do, they also have priority over common investors in the case of a bankruptcy of the said company or if the company’s assets are liquidated. They have a higher claim on assets and earnings than the common investor and the stock price doesn’t fluctuate the way the common stock does. On the flip side, they are also less prone to gaining value. Therefore, preferred stock is the best choice for investors who are mainly concerned about income rather than long-term growth.

Other types of stocks (in which common and preferred stocks can be found) are:

3. Blue-chip Stock: Gotten from the poker game where the most valuable chip is the blue one, it characterizes shares in large, well-established companies with a steady history of paying out dividends regardless of the economic situations. Such companies’ stocks are the ‘sweetheart’ of investors because there is a tendency to grow dividend rates faster than the average rate of inflation. An investor gets to increase his income without necessarily having to buy another share.

4. Company Size: Companies are generally classified into three buckets depending on their size, they are; Large Cap (with a market value of $10 billion or more), Mid Cap (with a market value between $2 billion and $10 billion) and Small Cap (with a market value between $300 million and $2 billion).

5. Location: Stocks are often classified by geographical locations. If you are a die-hard investor, you can decide to expand your investment frontiers to emerging and international markets apart from your local country.

6. Style: In terms of growth stocks, investors are typically willing to purchase a high number or quantity of stock (for bigger returns) from companies that are either growing quickly or have the potential to do so.  In terms of value stocks, on the other hand, such companies involved are mature, well-established companies that have already grown and do not have much room for expansion. Yet, they can be good choices for investors seeking more price stability and positive exposure to stocks due to their long-used, well tested, and trusted business models.

7. Industry: Companies are also classified by sectors. For example, stocks in the same industry – let’s say technology – may move together in response to market or economic events. That is why it is advisable to diversify across different sectors when investing.

8. Economy: National economies are inclined to trail cycles of development and reduction with phases of opulence and collapse. To these regards, we have Cyclical stocks and Non-cyclical stocks:

9. IPO Stock: These are stocks of companies that have, in recent times, gone public through an Initial Public Offering. Investors are always on the look-out for such stocks because they can get in on the ground floor of a promising business concept. On the flip side, they can be volatile or unpredictable, especially when there’s disagreement within the investment community as regards to their prospects for growth and profit. A stock by and large maintains its rank as an IPO stock for a minimum of a year and for as long as two to four years after it becomes public.

Types of Investors

An average man is entitled to purchase stocks in the stock market. However, each investor has personal motives for the purchase of stock, and this largely depends on such an individual’s trading personality.

In essence, your trading personality depends on how much risk you can put up with, what form of research you are agreeable to do, your perception of where the economy is headed, and the time limit you’ve set for your investment. Regardless of the individualism of investors, trading styles narrows down to a few distinct types which are considered below:

  1. Does not try to go for the biggest possible gains every time.
  2. Prefers reasonable gains with a lower level of stress and a lower level of commitment.
  3. Most times invest in mutual funds that can be managed by money managers with full rights to make buy-and-sell decisions.
  4. Tend to hold investments for more than a year.
  5. Tends to set structures for the addition of more stocks to their portfolio.

Core Advantages of Investing in Stocks

Some Disadvantages of Investing in Stocks

Want to Invest in Stocks? Step by Step Guide to Getting Started

For a newbie, the stock market and its process can be intimidating. Stocks are quite different from certificates of deposits, savings accounts, or money market funds because of their principal value rise and fall.

Therefore, to carve a niche in the investment world, one must be adequately armed with the necessary information and extensive research must be carried out. Also, such a person must have a tight rein on their emotions. That is why it is vital to learn the basics of investing in stocks.

  1. Assess Your Present Situation: The first thing to do before investing at all is to ensure that your general financial standing can accommodate a new activity without necessarily hurting other financial commitments. Ensure that your finances are duly organized and there is room for investment. To this regards, you’ll need to put the following factors into due consideration; employment (ensure that your source of income is secure enough to allow an investment), debt (don’t invest to clear outstanding debts, you might have more piled up on the present ones), family situation (ensure that your family is well catered for and there’s no extra mouth to feed on the way before you invest).
  2. Goal Setting: It is advisable to set goals for this investment before making it as it will guide you on the type of investor to be and possible expectations. The three questions that will guide you in achieving these are;

These questions will guide you in the decision-making process; they are personal questions every investor should consider.

  1. Money Reserve: Before investing your money, which comes with risk, ensure you have some put away that will not be subject to any risk whatsoever, either in the money market, savings account, or certificates of deposits. The purpose of this action is so that you can have an emergency fund that can cater to your financial needs in the advent of a momentary income disruption or if your investment takes a nosedive.
  2. Open an Investment Account: Overall, you need to have an investment account to invest stocks. If you want to do it yourself, you will need to open a brokerage account but for those who are looking into getting help, you’ll open an account through a stockbroking firm. In both cases, you get to open an account with a low amount of money, some providers even offer zero account opening.
  3. Open a Retirement Account: The best place to begin investing is in a retirement account because they stand for and ensure long-term investment, besides, they are tax-immune and are typically funded through salary deductions. This retirement account can be a 401(k) plan through your employer or an Individual Retirement Account (IRA) if there is no employer plan if you are self-employed.
  4. Start with Mutual Funds or Exchange-Traded Funds (ETFs): For starters, it is better to begin with mutual funds or ETFs rather than diving straight into stocks. The reason is that funds are professionally managed and will take away the responsibility of stock selection from you. All you are required to do is open an account with one of the various available ETF trading apps (usually commission-free). Then, go ahead to determine how much money you want to invest in a certain fund or group of funds. Another advantage of mutual funds is that you do not have to worry about diversification since each fund holds diverse stocks.
  5. Be Long-term Focused: The best thing to do – which is also the hardest – after investing is to conveniently forget it, do not look at them. Unless you are looking into becoming a guru in daily trades and subsequently becoming a broker yourself, it is best to avoid checking on the performance of your stocks obsessively.
  6. Manage your Stock Portfolio: While it is not advisable to fret over the state of your stocks, fluctuations, and whatnot, there is still a need to check in on your stocks from time to time. This is to ensure that funds and/or stocks are still in tandem with your investment goals.

Remember, investing in stocks is a great way to build wealth, either for the present time or for your future but the investment is also always a risk, so it is important to try to invest wisely.

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