Stocks: what they are, the different types, and how to invest

Listen to us – investing in the stock market may sound daunting if you’ve never done it before, but it can also be one of the best ways to make your money work for you. Here’s an overview of everything you need to know about stocks and how to get started investing.

What are shares?

Stocks are assets that represent ownership of a company.

Companies issue shares to give investors the opportunity to participate in their company. In return, these companies raise additional capital by selling stock to fund key projects or expand the business.

As the value of the company increases, so does the value of a shareholder’s stock, giving the investor an opportunity to build wealth as their investment portfolio grows. But it’s not always that seamless. When you invest in the stock market, you can expect a lot of ups and downs.

“U.S. stocks, as represented by the S&P 500 Index, have produced a historic compound annual return of approximately 11.88% since inception in 1957 through the end of 2021,” said Kevin Mahn, president and chief investment officer at Hennion & Walsh Asset Management . “However, these returns have not been consistent and have been accompanied by varying levels of risk in accordance with different economic and stock market cycles.”

Understand how stocks work

Stocks are bought and sold on exchanges, which act as intermediaries between investors and companies. Exchanges facilitate transactions through which investors can buy and sell stocks, bonds, commodities, and other assets.

In the US, the two main stock exchanges are the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations, also known as NASDAQ.

When deciding where to put their money, investors buy stocks in a company that they believe will be successful. “[Stocks] give [investors] an alternative and fruitful way to support and benefit from public organizations they believe in,” said Michael Wang, CEO and Founder of Prometheus Alternative Investments [environmental, social, and governance] Efforts or a specific cause that the company is collaborating with.”

When a company is doing well, investors receive profits in the form of dividends or capital gains. Dividends are periodic payments that the company pays to shareholders when it makes a profit. Capital gains are any gains made by the shareholder by selling their shares at a higher price than they originally bought them.

What types of shares are there?

Not all stocks are created equal. They typically fall into one of two categories: common stock and preferred stock. They work similarly, but there are a few small differences between the two:

1. right to vote: Common shareholders have the right to vote on matters related to company policy, board decisions, mergers, acquisitions and more. Preference shareholders usually do not receive the same rights.
2. Dividends: Both types of stocks pay dividends, however, preferred stocks typically pay shareholders fixed dividends while common stocks fluctuate. And if the company files for bankruptcy, preferred shareholders receive higher dividends and are paid before common shareholders.

How do I buy shares?

The easiest way to invest in stocks is through an online brokerage account. This is an account offered by investment firms where you can deposit and use funds to start buying assets and building your portfolio.

When opening an account, you will need to provide some personal information such as: B. Your social security number, name, address, telephone number, driver’s license number and other identifying information. In addition, you may be asked to answer some questions about your income, employment status, investment goals and risk tolerance.

Some of the most important factors to consider when choosing a brokerage account:

• Fees: Every brokerage account has a fee structure. You may be charged fees for obtaining statements, processing transactions, maintaining accounts, inactivity fees, and more. So before signing up for an account, it’s worth spending some time reviewing these fees and comparing them to other brokerage accounts to determine which options will benefit you the most at the lowest cost.
• Account Minimums: Certain accounts are free to open, others require a minimum deposit of thousands. Consider how much you are willing to invest before deciding on an account.
• investment style: If you’re a more active or passive investor, this can determine which brokerage is right for you. Some brokers offer in-person or over-the-phone services with a broker who can build, diversify and manage your portfolio for you based on your investment objectives and risk tolerance. However, these more personalized services may cost you more fees. If you want a more straightforward approach, consider letting a robo-advisor automatically create and manage your portfolio. Others allow you to be in the driver’s seat and manage your own account and may therefore be cheaper.

“Investors should consider a variety of factors, including but not limited to the history of the company, the experience of the advisors, the technology and reporting infrastructure, the company’s commitment to customer service, the types of products and solutions available, the insurance coverage and the law firm’s fee structure,” says Mahn.

After you open your account and fund it, you need to do some research about the companies you want to invest in.

“It’s important to look at a company’s fundamentals [like] Sales and earnings growth,” says Wang. “The track record and trustworthiness of the management team and their perception of whether the company is an attractive buy at the current valuation.”

Once you’ve decided where to invest your money, place an order for shares. This tells your broker what you want to invest in, how many shares you want to buy and at what price. Some orders are filled immediately, others take a little longer depending on whether you are waiting for a stock to reach a certain price before the order is filled.

There are alternative routes you can take to invest in stocks. One way is to buy stock directly from a company without using a broker, through a Direct Stock Plan (DSP). This saves some of the costs you may incur by using a broker, but may require you to be employed by the company or already own stock in that company.

There are several ways to invest in stocks, and you don’t need to save a specific amount of money before you can put your money on the market. But understanding how stocks work and what investment options are available to you is crucial.

“Equities can be used to meet a particular investor’s growth or even income goals in the case of dividend stocks,” Mahn says. “However, investing in stocks comes with unique risks that should be reviewed and understood before considering investing.”

EDITORIAL DISCLOSURE: Any advice, opinion or review contained in this article is solely that of Fortune Recommends™ Editorial staff. This content has not been reviewed or endorsed by any of our affiliate partners or other third parties.