What are stocks?
When you buy stocks, or shares, you're buying part of a company. A company will offer a number of shares for sale. You can buy some, hold them as long as you like, buy more, or re-sell them.
Buying and selling is also known as trading. Once trading begins, the price of the stock can rise or fall.
Most stock is bought and sold at a stock exchange. Examples of stock exchanges are Nasdaq, the New York Stock Exchange, and the London Stock Exchange. You can also buy over-the-counter (OTC) stocks, which are not listed on stock exchanges.
You don't buy and sell stocks yourself, but act through a stock broker or brokerage firm. Usually you make the decisions, and the broker represents you on the market. You can also choose to let the broker invest your money for you.
You might buy stock at a low price, and sell at a higher price to make a profit. Or, you might invest in companies that will pay regular dividends over several years, for a more stable flow of income. The stock you buy depends on your financial goals, and your personal investment style.
There are two types of stocks: common, and preferred.
Common stocks give you voting rights in the company. If you want to stage a hostile takeover, you would buy up as many voting shares in the company as possible. In general, common stocks give you a say in the way the company is run. Dividends fluctuate, depending on the fortunes of the company.
Preferred stocks return a fixed amount, with regular payments, but you have no voting rights. If the company has financial problems, the dividends on preferred stocks are paid before those of common stocks.
A company pays dividends in cash, or in shares. Taxes may apply to cash dividends.
Price of Stock
What determines the price of stock?
Broadly speaking, the price of stock depends on supply and demand. The more people buying the stock, the more its price rises.
The market price of a stock is not the same as its intrinsic (real) value. A stock price can rise, simply because other people are buying. People may buy in hopes of quick wealth, or because they have emotional ties to the product or service - or, just because everyone else is doing it.
Scams, such as Pump and Dump, take advantage of this. Worthless stocks become inflated in price by increased buyer activity, based on hype and high-pressure sales.
Avoid stock market scams and bad investments, with five simple rules.
- Research, research, research.
Research is your best friend on the stock market. Usually, companies offering stock for sale must disclose financial statements and other company information. Know the company history, the key players and company structure. Look at past performance, and strategies for the future. Know the industry as well as the company. Examine the economic factors affecting its success or failure.
Never invest in a company or industry you don't understand. If you do, it's not an investment. It's a blind gamble. Put personal feelings aside
Emotional factors can affect the price of stocks. Often, stock prices are driven by greed, emotion, or pure ignorance.
Keep a cool head. Don't buy out of impulse or passion.
Don't buy into wind power, for example, because you believe in saving the environment. Buy because the company has a solid performance record, a strong demand for its product or service, and good potential for growth and profit.- Diversify your stock portfolio
Buy stock in more than one company. If you're just starting out, choose at least three or four different companies. Even the most reliable stocks can take a sudden dip.
For instance, Maple Leaf Foods (MFI) stock was $16 a year ago. Recently, several people died of listeria found in Maple Leaf meats. In August of this year, stock hit an all-time low of $7.60.
MFI stock is now rising again, largely due to investor interest in the low prices. The company has a solid history and will probably bounce back. However, this illustrates the potential for a sudden price dive even in established companies.
If your portfolio includes several investments, you have a backup if one or two do poorly. Even seasoned investors make mistakes, or are subject to factors beyond their control. - Know when to hold 'em
If a company's revenues go down, so do the stock prices. Is it temporary, and will the company recover? Wise investors know when to hold their stock, and when to cut losses, and sell.
Don't listen to gossip or rumors. People will offer stock market tips, or claim to know stock market secrets, wink wink nudge nudge. Inform yourself, do your research, and make your own decisions. - The greater the risk, the greater the reward
In general, the more risk you're willing to take, the more potential for high return. Also, the more chance the investment will fail, and you lose your money.
Reliable companies command higher stock prices. Returns are less, but so is the risk.
If a stock offers high return with low risk, be wary.
Experiment without Spending
Before investing your hard-earned money, set up a mock portfolio with several stocks. Follow your investments online, and chart their progress. Amend your choices, "buy and sell", and watch them perform in real time, without risking a penny.
What is the Capital Gains Tax?
As usual, the tax man is after a piece of your pie. If you sell your stock at a profit, a capital gains tax applies. Taxes may also apply to stock dividends.
You have a capital gain if you sell your stock for a higher price than you paid. If you sell your stock for less than you paid, it's known as a capital loss.
If you hold your stock for longer than a year, it's a long-term capital gain. Under a year, you have a short-term capital gain. Short term capital gains are taxed as regular income.
Long-term capital gains holders pay a tax of up to 15%. However, in 2008, investors in the 10 - 15% tax bracket paid a long-term rate of 0%. This won't change until the year 2010, when the rate will go back to 15%.
Be aware of the tax advantages or disadvantages of any stock you purchase.
What's Your Investment Style?
Are you a hard-nosed rogue or an armchair softie? Does losing money fill you with stress and worry, or do you hunger for challenge? Are you looking for a quick profit, or a long-term retirement strategy?
Understand yourself and your goals before you invest. Read up on the investment styles and strategies of top investors like Warren Buffett, his mentor Benjamin Graham, and people like Kirk Kerkorian or Jesse Livermore. You'll find that their styles are different, but they all believe in the five simple rules listed above.
Stock Brokers
When you're ready to invest, choose a stockbroker or brokerage firm that you trust. Licensed brokers are either full-service or discount brokers.
Decide on the type of service that's best for you. Again, research is your friend.
With a basic understanding of the stock market, you can make confident, informed decisions, and increase your chances of investment success.
Blessings.
Sincerely,
-Liane Schmidt.