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If you’re on this page, then I’m guessing there’s a good chance you’re looking into investing in the stock market. Congratulations! Investing is a great place to start accumulating some wealth, IF YOU DO IT RIGHT. So, let’s get right into it.
A stock in simple investing terms is an ownership of a company. It’s also called having equity or a share in the company and throughout this post I will use the terms stock and share interchangeably but they are both equivalent.
In addition, someone that owns a stock for a certain company is a shareholder of that company. So as an investor, you can buy shares of Apple for instance and you will own a fraction of the billion-dollar tech corporation!
As a result of being a shareholder you get some power and benefits, not much but a little, you can choose and vote for the Board of Directors in some cases, and you will also benefit when the company performs well.
For example, if Apple does really well on iPhone 8 and iPhone X sales and their profits are huge, the stock price could increase, and that means that your shares of Apple may be worth more than when you bought them. Now, as a shareholder of Apple. This is how you could make money from your investment, there are two basic ways:
Capital gain is the difference in what you paid for the stock and how much you sold it for. So for instance, if you bought 2 shares of Apple at $100 and they did amazing on their sales and as a result the stock price increased to $110 then you can sell your shares at that price and pocket the difference.
In this case, your capital gain would be $20! Not too shabby considering your initial investment was $200 for 2 shares of Apple, giving you a 10% return on your investment.
Don’t expect results like these to happen overnight though, it depends on a lot of factors how much percentage yield you will get from your investment. On the other hand, if Apple doesn’t perform well in the stock market, the stock price may also decrease. If this happens, your shares of Apple may be worth less than the price you purchased them for.
At this point, you can decide to sell your shares and take a loss or you can ride it out and wait for the price to increase again, which isn’t certain. It all depends on the market, and no one can predict with 100% accuracy if the stock price will go up or down. Therefore, when you sell your shares in Apple, if you sell it at an increase, this profit is called your capital gains otherwise it’s a capital loss.
The second way you can profit from is dividends. Not all companies give dividends to their shareholders but some of them do. Dividends are a small part of the company’s profits that they share with their shareholders.
They are usually distributed every quarter, or every 3 months. For example, let’s say that Apple shares their profits and distributes quarterly dividends of $0.50 per share to their shareholders.
If you still had those 2 shares of Apples that means every 3 months you’re expected to receive $1.00 so over the year you will have accumulated $4.00 in dividend payouts from just investing in Apple, no matter what the stock price is.
However, dividends aren’t always guaranteed but it’s more likely if the company has been distributing dividends for a while and is still bringing in good profits. Therefore, just as a company can decide if they would like to pay dividends to their shareholders, they can also decide to stop them at any time.
As you know now, stocks have prices associated with them, as you’ll often see when you see stock tickers on news. This is the price that the stock is selling for at that exact moment in time. A company’s stock price changes, and goes up and down numerous times throughout the day. However, different companies stock prices will change differently.
For example, Apple has been established for a long time and is constantly bringing in billions of dollars in revenue and although it’s share prices might fluctuate throughout the day it won’t vary too much overall. But, if were to look at a newer company like Roku, we would see that its stock price varies much more day to day compared to Apple. This, my friends is called volatility.
Simply, volatility means how drastic the stock price may change day to day. In our case, Apple shares have a low volatility, meaning that the stock price will go up and down but not by a lot. Roku, however, is highly volatile, this means that the share price could go up or down by a large amount when compared to its stock price.
It’s a good idea to check the volatility of a company before you purchase shares in it. Therefore, the higher the volatility, the riskier it is to invest in that company. The profit AND loss margins can be large with higher volatile companies. This is just another aspect to should keep in mind when you invest.
Actually Buying A Stock:
We’ve been talking quite a bit on what a stock is and how you can make money from it and all, but let’s go back. How do you actually buy a stock? To buy a stock you need what’s called a brokerage account.
Simply put, a brokerage account can be a website or an app that you connect your bank account to and transfer funds from your checking or savings account into your brokerage account. There are multiple different brokerage accounts out there.
If you’re curious and would like to learn more about some popular ones and how they compare then check out their different websites and see which fits best for you!
For beginners though, I would recommend Robinhood, it’s what I started off with and what I still use at the moment to invest in stocks. There are no commission fees, meaning it’s FREE to start trading stocks and you don’t need a minimum to get started.
You just won’t have certain features since Robinhood is free, however those are for more advanced investors anyway. If you do decide to use Robinhood, I have a step by step guide here you can follow where you can even get a FREE stock just by signing up!
There you have it! You’re one step closer to begin investing! I hope you have a better idea now of what a stock is and learned a little bit about investing in the stock market! If you would like to learn more, then check out my post how to start investing.
Feel free to leave a comment if you have any questions or anything, I’ll be glad to address them! Also if you enjoyed reading this, then consider subscribing to Parhelia Finance’s email list below and sharing it on social media!