Do you know how to understand stocks? Or do you feel like they’re completely impossible to even remotely understand?
Here is a brief explanation: A stock is an investment in the equity of a company. When you purchase a stock, you become a shareholder. While you now own part of the company – no matter how small – you share in both the successes and the failures of the company.
If you do them correctly, stock investments over the long term will substantially increase your overall personal wealth. However, it is necessary that you have a very good understanding of investing in stocks before you take the leap.
So, take some time to learn and study the stock market and how to properly learn about the companies that you’re interested in investing in.
How to Understand Stocks in Just a Few Short Tips:
When you decide you want to invest some of your money into the stock market, don’t put all of your eggs in one basket – take some time to investigate several different companies and distribute your money among them. This way, if one of the stocks happens to lose value, it’s possible that the others will rally and you won’t lose your money.
Pay attention to the past performance of those companies that you’re considering investing in. Of course, past performance does not guarantee future earnings, but it can be a good indicator of future earning potential.
Remember that there are some stocks that will earn you money slow and steady, while others will be rising and falling according to changes in the economy. There are lots of factors that affect the stability of the stocks, and you will need to do your research in order to discover those factors related to the stocks that you want to invest in.
Before you invest, think about the long term benefits of investing your money into stocks rather than government bonds or CDs. Quite often, those investments that are considered to be ‘safe’ will actually cause you to lose money if the earned interest isn’t enough to keep up with the rate of inflation.
When you decide to invest, be smart about it and spread your money out among several stocks. Learn how to understand stocks by considering the risks of your chosen prospects. Try to find a happy medium of both high and low risk stocks in order to maximize your earnings over time.
Even if you plan on managing your own portfolio, it helps to sit down with an experienced financial consultant and go over your options. Together the two of you can put together an air-tight crash proof portfolio.
Finally, if you can’t afford to lose it, don’t put your money into stocks. Make sure that you get your bills paid first and then let stocks be a way that you can invest the “extra” that you have after your budget items have been taken care of.
Understanding Stocks: Terms to Know
If you’re going to invest in stocks, there are a few things you need to know. Read over the following terms and make sure you have a clear understanding of them before taking the plunge.
- Ticker: The ticker symbol is how you can identify the stock on the markets that it trades on.
- Price: The price is what the stock is trading at- this will be constantly changing through the day while the market is open.
- Chart: This is what reflects the change in the stock’s price as the day goes on. A chart is extremely helpful in revealing trends and other information and can help you to learn how to read and understand stocks.
- Previous Close: The price of the stock as of the previous days’ close.
- Today’s Open: The price of the stock as of opening today- the price can possibly change overnight due to trading after-hours.
- Volume: This is the number of shares that were traded for a particular day. This can be compared to the average volume in order to determine if the stock is trading at a higher or lower rate than usual.
- Dividend yield: This is a big one. Dividends are the amount of money that is paid by the stock to the shareholder in a year divided by the sale price for the day. Some consider this to be extremely important in understanding stocks because in order to issue rising dividends, the company must be strong and healthy. You want to purchase stocks that have high dividend yields. However, keep in mind that companies occasionally will issue high dividend yields even if they aren’t doing well. However, there are others that don’t issue dividends at all, no matter how well they’re doing.
- Earnings Growth: This is a list of three values that will show you how profitable a company was the previous year, the current year, and what their plans are over the next five years. You want to make sure you invest in a company that has a bright future with plans to expand over the next five years.
- Revenue Growth: this is different from earnings- this is the sales and income taken in by the company. Revenue doesn’t consider the expenses taken on by the company. This is important to consider because revenue can’t be manipulated the way that earnings numbers can.
- P/E Ratio: This is probably the most widely used metric that is focused on by investors when learning how to read and understand stocks. This gives you the amount that you’re paying for a company’s earnings. This is the price of the stock divided by the earnings per share.
- Price/Sales: This gives you more information on what you’re paying for the sales of the company. This is important, because like revenue growth, it isn’t as easily to manipulate as earnings. A lower number is much more attractive.
- Price/Book: This is important because it shows whether a stock is under- or over-valued. When you divide the price by the book value, you find what people are paying versus how much the company is actually worth. If the P/B is under 1.0, the price is most likely trading below what the company is worth. If the P/B is over 1.0, the price people are paying is much higher than what the company is worth.
The Benefits of Investing in Stocks:
There are lots of interesting benefits when it comes to owning stocks.
Some of them have features known as options. These options include being automatically purchased or sold at certain prices.
Then, other stocks may have very limited benefits, but the profits are much more reliable – these are called preferred stocks.
Then, there are some stocks only available to certain investors, and still others can be converted to other forms of security over time.
Stocks have been proven to hold their value over the long term and often prove to be a way to make a quick buck or two. Unlike other investments, the stock market can be quite volatile- but the greater the risk, the greater the potential for return.
Sometimes stocks pay dividends which are a share of the stock’s earnings to the stockholders on a schedule – typically quarterly. This means that investing in stocks will give you the benefit of providing a cash income while still maintaining ownership of the stock. Over time, based upon the performance of the stock, your dividends could increase.
Stocks are considered liquid assets, which means that they will not be unsaleable or tied up, like other financial investments, such as CODs. So, you can sell them quickly if you need money right away. Additionally, you can purchase and then turn around and sell the stock all in the same day- though you may end up having to take a loss doing it that way.
Owning stocks is a passive sort of ownership – as a stockholder, you have the advantage of owning part of the company, but you have no risks beyond your financial investment. So, if you invest in a stock and it fails, you’re not required to cover any losses incurred by the company and will only lose the money that you put into it.
This is just a very basic introduction in how to understand stocks. There is a huge amount of information out there that can help guide you in investing in stocks. Speak with a financial advisor if you’re still having difficulty understanding.
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