Investing in stocks is one of the four main types of investments, along with cash, bonds, and equity investments. It involves risks, but it can offer higher returns. In this article, we will learn about what stocks are, how to invest in the stock market, and the risks involved.
What are stocks?
A stock is a share or portion that represents a small unit of ownership in a company. If you buy shares in a company, you own a certain share of ownership in that company.
You can own shares yourself (direct investment), or you can pool your money with other people’s money and invest them together in a collective investment (mutual funds). Mutual funds purchase a group of shares that are selected and managed by a fund manager. If you invest your money in a fund, you don’t have to make individual investment choices.
When you own shares directly, you become a shareholder in the company, which usually means you have the right to vote on some company decisions. This does not happen if you invest in an investment fund.
Shares are bought and sold on the stock exchange or stock market.
How does the stock market work?
It’s essential to understand the nature of investing in the stock market first. Investing in things whose details you don’t know can lead to financial losses and risks. What are the most important things to know before investing in stocks?
Investing in stocks means buying them and holding them for a period of time to achieve financial gains. Money is earned from stocks in two ways:
- If a company grows and becomes valuable, the value of its shares will increase, and as a result, you will make a profit as the value of your investment in that company increases.
- Some companies distribute profits every year to their shareholders, and this is called cash dividends.
If you buy stocks in large, long-term companies , you’ll receive dividends but not rapid share price growth. Dividend-paying stocks are good if you’re a long-term investor seeking steady income, not a significant increase in share prices.
Small companies, on the other hand, often do not distribute annual dividends to their shareholders. These companies have a greater opportunity to grow rapidly, which provides a greater rate of growth for the invested capital, but the risk may be higher. [1]
Ways to invest in the stock market
How do you start investing in the stock market? You can invest in the stock market either directly on an individual level or through investment funds:
1. Buying and selling stocks:
If you prefer to buy and sell stocks individually and rely entirely on yourself (you can seek the help of an expert or financial advisor on an ongoing basis), you have three options for direct investment:
- online broker
- traditional stockbroker
- A financial advisor or investment manager who you can ask to buy or sell stocks on your behalf, and they will of course do this through a broker or intermediary.
2. Investing through an investment fund:
In a collective investment, many people put their money into an investment fund, which is invested in stocks or other assets, such as bonds, cash investments, or investment properties, selected by a professional fund manager.
You can invest in mutual funds either through banks, a fund manager, a financial advisor, a traditional broker, or an online broker.
The benefits and risks of investing in the stock market
Stock prices can also fall, so buying stocks is not without risk, but over the long term, they can provide good financial returns. If you want to double your money in a year, for example, stocks are not the best way to do so. However, if you intend to invest your money for 5 or 10 years or more, the stock market is a profitable long-term option.
Stocks are designed to provide investors with two types of returns: annual income and long-term capital growth.
Most stocks provide income in the form of dividends, which are typically paid twice a year. Dividends can be considered a reward to shareholders. Dividends are distributed when a company makes a profit and has liquid funds after meeting all of its obligations.
In most cases, the more profitable a company is, the higher its dividend payout will be. If a company earns large sums of money and pays large dividends, it is usually considered a good investment and the company’s stock price will rise.
Stocks can be invested specifically for steady income. Many companies generate significant profits each year, and a portion of their profits may be used for general corporate purposes, such as paying rent and wages. Companies may also use a portion of their profits to invest in equipment and research and development. In return, a percentage of their profits are distributed to their shareholders. Since dividends are typically paid twice a year, they can provide investors with a regular income.
Companies that pay generous dividends are known as income stocks.
Some companies have massive investment programs, so they reinvest all of their profits. These companies are often in the early stages of their development and are keen on expansion and growth, and are known as growth companies. Their stock prices rise when they successfully achieve their investment plans. [2]
Long-term capital growth is achieved when a stock’s price rises over a certain period of time.
Investing in the stock market is either an investment or speculation.
A stock market investor selects a company’s stock after reviewing the company’s performance, its services, and the strength of its products. They also review its quarterly (quarterly, semi-annual) and year-end financial statements. They compare the company’s performance over different annual periods or with that of a competitor. This method is called fundamental analysis. This method is followed by those who want to make profits from their expectation of a stock’s rise over several months or years, or even receive dividends from the company in exchange for holding the stock. This stock acquisition strategy is called buy and hold, meaning owning the stock and keeping it in the investment portfolio for a period.
A stock market speculator analyzes a stock using a stock performance chart. Speculators typically pay no attention to the company’s products and services or its financial statements. All they care about is the stock’s movement, as reflected in the chart. This type of analysis is called technical analysis. Speculators are divided into several categories, including swing traders and day traders.
Conclusion: Studies have repeatedly proven that investing in stocks is one of the best long-term investments in the financial market, tending to outperform government bonds, corporate bonds, real estate, and many other types of assets.
