Learning how to invest in stocks can pave the way to making millions, but it can also bankrupt you just as fast. The stock market is one of the first things an eager investor thinks about when they want to make money or invest.
If you learn how to invest wisely and have patients, the lifetime value of your stock investments can yield returns that far outpace your income. In order to achieve this, you need to understand how the stock market works, what your investment goals are, and if you’re willing to handle quite a bit of risk.
The stock market can be one of the biggest risks for an investor if you’re not patient and rush to judgement.
What are Stocks?
A stock is an equity investment that represents your legal ownership of a company. The total number of stock you have for a company, and in some cases shares, is the overall percentage of that company you own. A corporation will issue stock in two variations: common stock and preferred stock.
A common stock entitles you to a proportionate share of the company’s profits and losses. A preferred stock comes with a predetermined dividend payment.
Why Invest in Stocks?
The key to investing in stocks is to make a profit either short-term or long-term. You can do so by either playing the market to sell when the stock price increases or hunt for stocks with quarterly dividend payments. The bulk of stock investors try to balance between to two with more leaning towards dividend payments.
By buying into a stock with dividend payments you can start to accumulate interest over time. For example, let’s say you buy $1,000 of a stock and you add $100 every month for 10 years. Your total investment would be $13,000 by the time the 10 years is up. Let’s say you had an 8% gain on your portfolio (most portfolios sit around 10%). In that 10 years you now have around $19,500 in your portfolio meaning you’ve made around $6,500 over those 10 years.
This may not seem like much but we are talking about investing in smaller amounts. The more you put away for investing, the more money you could make in the long run. Taking that same scenario but instead of starting with $1,000 you start with $5,000 and you add $150 per month for 10 years. You would have a total portfolio value of around $37,000 with an investment of only $23,000.
The key is to monitor your investments. Not every stock investor holds onto their portfolio for 10 years and it highly depends on what types of stock you’re buying into.
Stock Prices: How do they work?
The stock market tends to work like an auction house. You’re up against individuals, brokers, companies and in some cases governments. A company’s performance or even news about the company doesn’t directly affect the stock price. The price changes because of the reactions investors have. If the company has good news then sellers will hold and people will want to buy in, driving the price up and vice versa.
The price of a stock will go down when there are more sellers than buyers. It will go up when there are more buyers than sellers.
What is Stock Market Capitalization?
A stock’s market capitalization, or market cap, is the sum of the total shares outstanding multiplied by the share price. For example, a company’s market cap would be $1 million if it had 1 million outstanding shares priced at $1 each.
The market cap has a lot more meaning to it than the share price. A market cap allows you to evaluate a company in the context of similar-sized companies in its own industry. A stock price can be misleading when you’re researching which stock to buy and it’s not always best to make decisions based on the current market price. The market cap helps fix some of that.
For example, Company A trades around $100 per share and Company B is trading around $60 a share. If you were to look at the price alone you’d think that Company A was worth more than Company B. The key here is to look at the market cap. If you look at the market cap you may see that Company B has a substantially greater amount of outstanding shares and thus is in a different class than Company A.
When you’re researching stocks, most companies are grouped by market cap:
- Small-Cap: $300 million to $2 billion
- Mid-Cap: Between $2 billion and $10 billion
- Large-Cap: $10 billion or more
A stock split will occur when a company increases its total shares by dividing up the ones it currently has. This is almost always done in a 2-to-1 ratio. This means that if you own shares in the company you will get more shares from them at whatever the ratio they determine is.
For example, if you had 100 shares of a stock that was priced at $20 then you now have 200 shares of a stock priced at $10. The total number of shares change but your total invested value remains the same, or at least it should. In some cases a split can hurt others if the price drops but more often it helps them as others want to buy in at a lower price point.
Dividends with Stock
A dividend is a quarterly payment that companies send to their shareholders. Many investors take advantage of dividend investing. It’s a popular investing methodology where you only invest in stocks that provide dividends. These investors will take the quarterly payouts and re-invest them into their portfolio and buy more stock. If you’re not interested in growing that specific portfolio you can take payouts each quarter and use the money at your own discretion.
For example, if you bought $2,500 worth of shares in Verizon back in 2010 and added $100 per month for 10 years then your total investment would be worth around $27,000. You would have an average annual return just under 10%. To put it in layman’s terms, you would have doubled your investment by rolling over dividends and taking advantage of DRIP investing.
How to Buy Stocks
There are really only two ways to buy stocks and you’re stuck with either using a brokerage or an investment app. Both of these types of platforms will give you the ability to buy, sell and even research potential stocks to buy. The main difference between the platforms are the types of fees you incur when you make trades.
A traditional brokerage company like Fidelity or TD Ameritrade will offer zero-commission trades from time to time. You may even find some apps like Robinhood or Webull offering the same. This makes it easy to buy stocks without having to worry about paying a commission for an investment manager.
If you’re still interested in buying stocks, here are the steps to buying stock:
- Find a Stockbroker
- Research Stocks
- Decide on Investment
- Decide on Stock Order Type
The easiest way to buy stocks is to find an online broker. After you’ve opened and funded your account you can buy stocks straight through their website or app. These trades typically happen within minutes of your order. You can take advantage of a full-service stockbroker if you’d like but keep in mind there may be extra fees involved.
After you’ve found a broker you’ll want to make sure you research as much as possible. You should look for companies that you interact with daily, whether it’s their products or on social media. You’ll want to buy into companies you believe in and less on stock price. Avoid sticking to only the “here and now” with stocks. You’ll want to review the history of the stock and look at how it handled various economic crises and to make sure that it has kept a healthy gain year over year.
Once you’ve figured out the stocks you want to buy into, it is time to figure out how many shares you want. This will entirely depend on your investment plans and finances. You shouldn’t spend all of your savings on stocks and you should try to keep an emergency savings fund active. It doesn’t take much to make money in the stock market and even investing with smaller amounts can still prove to be fruitful.
You’ll then want to place an order for stock. There are a few main order methods when you go to buy a stock and they are:
- Market Order: You request to buy a stock at the best available price (typically the current price).
- Limit Order: You request to buy a stock at a specific price or better (lower).
- Stop Order: You request to buy stock when a certain price is hit.
- Stop-Limit Order: You request to buy stock at a specific price as long as the price is met. If the price goes higher you no longer buy stock. If it returns then you will continue to buy stock again.
How to Sell Stocks
The process to selling a stock is very similar to buying a stock. You have the same options available to you when trying to sell a stock. These stock selling options are:
- Market Order: You request to sell a stock at the best available price (typically the current price).
- Limit Order: You request to sell a stock at a specific price or better (higher).
- Stop Order: You request to sell stock when a certain price is hit.
- Stop-Limit Order: You request to sell stock at a specific price as long as the price is met. If the price goes lower you no longer sell any stock. If it returns then you will continue to sell stock again.
If you’ve selected an online broker or are using an investment app then you can sell right through your platform. You’ll need to be careful as selling stock can incur fees, taxes, or other financial hardships if you’re not careful.