Why Do People Invest in Stocks?

Larry Takahashi |

If you’re still unsure about investing in stocks or have questions on how buying stocks actually works, here are a few quick questions and answers about the entire process, from what exactly is a stock, to how do you buy stock.

What exactly are stocks?
While the term may be confusing, the actual answer is less so. Stocks are simply a share of the ownership of the company that you’re buying stock in. Of course, the more company stock you purchase, the more ownership you have in the company. And along with ownership rights, once you become a stock holder, you also have voting rights. Only public companies issue stocks that are available for the general public to purchase.

How do you buy and sell stocks?
In order to purchase stocks, you will need a stock broker or an account at an online brokerage firm. Many beginning investors prefer the anonymity of an online stock brokerage account, although there are distinct advantages of using a stock broker, who typically has an in-depth understanding of the market and how stocks are performing.

How do you make money from buying stocks?
The most common way to make money on stocks is to purchase them at a lower cost, hold on to them for a period of time, and then sell them at a higher price. Of course, there are many times that stocks may go down in price, leaving you with a stock that is worth less than what you paid for it. That’s why investing experts typically recommend holding on to stocks for a longer period of time, since market fluctuations can cause large drops in stock value that later recover. The other way to make money on stocks is to hold onto any shares purchased and collect dividends, which are paid by companies to their shareholders. Dividends are usually paid quarterly, but it’s important to remember that companies don’t have to pay dividends on stocks at all.

What are the different types of stock you can purchase?
There are two types of stocks that can be purchased. These include Common Stock and Preferred Stock. Common stock represents an ownership stake in the company that is issuing the stock as well as voting rights, while Preferred Stock gives stock holders certain advantages not available to common stock holders such as a predetermined dividend amount as well as the option to be paid before common stock holders should a company face liquidation.

Are there any disadvantages of investing in stock?
Like any investment, stocks can prove to be profitable, or provide nothing in return for your investment. Volatility is the number one disadvantage of investing in stocks, but if you’re able to hold on patiently through any volatile periods, you’ll likely fare well.

If you’re patient, willing to do some initial research, and are comfortable with uncertainty, investing in the stock market may be a good route for you to take.

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2024 Advisor Websites.

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