What are stocks? A complete walkthrough for beginner investors
The stock market is becoming more accessible — you can even make trades on your phone. But what are stocks, exactly? Here's what new investors need to know to add stocks to their investment portfolio.
6 min read
The following statements do not constitute investment advice or any other advice on financial services, financial instruments, financial products or digital assets. They are intended to provide general information. The following statements do not constitute an offer to conclude a contract for the purchase or sale of financial instruments and financial products or an invitation to submit such an offer and to buy or sell any particular digital asset.Stocks and ETFs are subject to high fluctuations in value. A decline in value or a complete loss are possible at any time. The loss of access to data and passwords can also lead to a complete loss.
Ownership stake: Stocks represent partial ownership in a company.
Trading venues: Stocks are bought and sold on stock exchanges.
Potential returns: Investors can profit when the price of their stock goes up or if their stock pays dividends.
The world of investments sometimes feels like a maze of jargon and uncertainty. Beginner investors venturing into the financial market for the first time might wonder: What are stocks, exactly? In this comprehensive guide, we demystify stocks for beginner investors, so that you can fully understand what they are and how stocks work.
What are stocks?
Stocks represent ownership in a company. When an investor buys a stock, they’re buying a share of ownership in that company, and as a shareholder, they earn some of the company's profits through dividends – and possibly through capital appreciation, if the price of the stock goes up. Stocks are tradable securities, bought and sold on stock exchanges. Their value varies according to the company's performance, market conditions, economic trends, and even investor sentiment. When investing in stocks, you can participate in the growth and success of companies across different sectors and industries.
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Every financial asset is different. The features that make stocks unique are:
Ownership stake: Owning a stock means owning a portion of a company. Shareholders might have certain rights, such as voting on corporate decisions and receiving dividends (more on that soon!).
Potential for capital growth: Stocks offer the potential for capital appreciation. If the company performs well and its value increases, the stock price typically rises, allowing investors to sell their shares at a higher price than what they paid.
Dividends: Some companies distribute a portion of their profits to shareholders in the form of dividends. Not all stocks pay dividends, but for those that do, it's a way for investors to earn regular income.
Liquidity: Stocks are generally liquid assets, meaning they can be bought or sold relatively quickly in the stock market.
Market exchange trading: Investors can trade stocks on stock exchange markets like the New York Stock Exchange (NYSE) or NASDAQ, where buyers and sellers come together to transact.
Like most financial assets, there's market volatility in stocks. This means their prices can fluctuate significantly — which offers both opportunities and risks for investors. The more you understand these features, the more you can make informed decisions while navigating the stock market.
Where did stocks come from?
Trading and investing in stocks might sound like a recent trend, but stock exchanges have existed since the 1600s — the Amsterdam Stock Exchange (now Euronext Amsterdam) started in 1602, and the London Stock Exchange, in 1698. These exchanges provided a regulated platform for buying and selling shares and gave investors opportunities to participate in economic growth. On this front, not much has changed. Over time, however, other things have changed. Technological advancements, the rise of global financial markets, regulatory changes, and the introduction of electronic trading have revolutionized stock trading, making it more accessible and interconnected than before. These developments have also added more transparency as a whole to the financial and investment markets.
Considerations and strategies for investing in stocks
Before investing in stocks, make sure you consider your individual financial goals, personal risk tolerance, and most importantly, your budget. Here are a few points to consider:
What to consider when buying stocks
When buying stocks, it's essential to research the company you're interested in. Consider their financial health, growth potential, competitiveness, and any industry trends that might influence the company’s performance. Professional investors often analyze factors like earnings reports, management quality, and market conditions before making investment decisions. Strategies vary, from long-term investing in established companies to seeking growth opportunities in emerging sectors.
What to consider when selling stocks
Knowing when to sell stocks is just as important as knowing when to buy them. Investors might decide to sell stocks not only to profit, but also to cut losses or rebalance their portfolios. To support your financial health and protect yourself against major market fluctuations, it’s wise to define your exit strategies in advance. This could mean setting a target price or watching for certain changes in a company's fundamentals, for example.
Where can you buy stocks?
There are a few options for buying stocks: individual stocks, exchange-traded funds (ETFs), mutual funds, or even thematic portfolios. ETFs and mutual funds reduce risk through diversification, while individual stocks have the potential for higher returns — but come with higher risk.It’s crucial to understand these considerations and develop a strategy that’s aligned with your goals. This can help you navigate the complexities of the stock market and build a robust investment portfolio.
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A diversified investment portfolio is key to financial health and risk management. Stocks play a significant part in that diversification, and they’re known as a tool for generating income and growing your wealth.
Legal and regulatory aspects
Stock markets have a framework of legal and regulatory standards to ensure fairness, transparency, and protection for investors. Stock issuance, trading practices, disclosure requirements, and even the behavior of market participants are all regulated. This reduces the risk of scams and makes the stock market more secure for both investors and companies.
Investing in stocks: what are the risks (and rewards)?
Investing in stocks comes with inherent risks and rewards. On one hand, there's the potential for high returns and creating wealth, not to mention financial stability in the long term. On the other, market volatility and fluctuations increase the risks, along with economic downturns, geopolitical events, and company-specific risks. Understanding and managing these risks is crucial to invest in stocks successfully and capitalize on the potential rewards. If you want to integrate stocks into your investment portfolio, make sure you have a clear grasp of the associated risks and rewards, and always align your investments with your individual risk tolerance and financial goals.
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FAQ
Choosing stocks to invest in typically involves evaluating companies and their financial statements, industry trends, and your own risk tolerance. Many investors also look at factors like company management, competitive advantages, and growth potential.
Common stocks represent ownership in a company and usually come with voting rights. Preferred stocks generally don't have voting rights but have priority for dividend payments and assets if the company liquidates. Preferred stocks often have a fixed dividend rate, while common stock dividends can vary.
Stock dividends are payments that companies make to their shareholders, usually from profits. They can provide regular income for investors and can indicate a company's financial health and shareholder-friendly policies. However, not all stocks pay dividends.
Many factors can affect stock prices, including how well a company performs, the economy, industry trends, investor sentiment, geopolitical events, and supply-and-demand dynamics. Company-specific news, earnings reports, and broader market movements can also impact stock prices.
You don’t need to be rich to invest in stocks. Some investors use online brokers with low or no minimum deposits, or invest in fractional shares or low-cost index funds or ETFs. Some platforms also offer micro-investing options that let you get started with very small amounts.
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