Investing in Stocks

A stock is a claim on the earnings and assets of a company. Investors buy stocks in companies they think will go up in value. They then sell the stock at a profit when the price rises.

There are two major types of stocks: common and preferred. Both types offer voting rights and dividends.

Choosing the right type of stock is important to your investment strategy. Common stocks provide the most voting rights and allow you to participate in company decisions, such as management elections or structural changes. They are also the most common form of ownership.

Some investors prefer preferred stock, which typically doesn’t grant you voting rights but does allow you to receive dividend payments first if the company goes under. Preferred shareholders also have a priority claim on the company’s assets should it file for bankruptcy or liquidate.

How much you can afford to invest in stocks depends on your financial situation and investment goals. Some brokers let you buy a fractional share, which lets you start small and work your way up.

When you decide to invest in a stock, it’s important to research the business and its financials thoroughly. That means reading the company’s annual report, examining conference calls and reviewing recent news reports.

Earnings, interest rates and long-term trends are important aspects of valuing stocks. Over periods of five years or longer, the market’s prices closely follow corporate profit growth.

Many investors use a “market” valuation to assess stocks, where they assume that each dollar of earnings per share is worth one real dollar of income to the owner. That’s based on the assumption that a company will use that earnings for growth and pay dividends, and that future earnings will increase as profits do.

Technical analysis is another approach to evaluating stocks. It is based on supply and demand; more people want to buy a stock than sell it, so the stock price will increase. This approach is a good way to assess short-term trends, but it’s not for everyone.

If you’re a newbie to stock investing, the most important thing to remember is that it doesn’t have to be hard. As long as you understand the basic principle of buying into a company because you want to own it, not just because you expect to make money from the stock, you should be able to pick winners.

There are a lot of resources online to help you determine which companies you should buy stock in. These include company websites, analyst reports, and even stock-rating sites. Some even have basic seminars and tutorials to teach you how to use their tools and research. And if you’re lucky, your broker will have a “picks” section that will tell you which companies to invest in and why. Taking the time to do your research can be an excellent way to build wealth over the long haul. You can also try buying mutual funds, which are like giant baskets of stocks and may reduce your risk.