An idiot's guide to stocks and shares
Anyone looking to invest their money should consider stocks and shares. They can give a return of 10 to 12% in the longer run, but what exactly are they and how do they work?
What are stocks and shares?
Many years ago, stocks and shares were considered something only the wealthy bought and sold, but they can now be purchased by the average person looking to get a decent return on their money. Generally speaking, the stock is the total value of a company; its assets, profits and its good name, and this stock is divided up into shares.
What you buy is a share of a company’s stock, and you can buy a number of shares at a time, depending on how much money you have to invest. You can buy shares when the company originally puts them up for sale, or you can buy them from other people who are selling them on.
Essentially each share is a small piece of the company and, as an owner of a tiny bit of the company, you should receive part of the earnings. You also get a vote in who runs the board.
Read more: 8 Alternative ways to invest your money
Why would a healthy company want to share its earnings?
A company sells shares to raise money, rather than borrowing it from a bank. In return for the cash investment, the shareholder usually gets a share of the profits, known as a dividend.
The board decides whether a dividend is going to be paid, if it is financially sound to do so, and how much each share will get.
How do I choose a stock?
The idea is to make as much money as possible, and there are many ways to do this. Some shares regularly pay out a high dividend, but the actual buying and selling price of each share does not fluctuate much at all.
Other stocks pay out a small dividend or even no dividend, but the company is constantly doing well, so the share price is climbing. The profit is made when you sell your shares at a higher price than the sum you bought them for.
Why do share prices go up and down?
The price of every share goes up and down on a daily basis, but over the long term they should, hopefully, go up. Worldly events can affect the price of the entire stock market or just some parts of it. A natural disaster, changes in laws, a particular country’s economic results—these are just some of the factors that can either give investors more confidence or make them nervous.
The financial results of a particular company will affect its value, as will the results of its competitors. When investors are unsettled, it can cause them to sell their shares, and if there are suddenly more shares for sale, this will bring the price down. The opposite will occur when things are going well. There are lots of things to consider when selecting the right shares for you.
Learn the basics of investing in stocks with How To Make Money In Stocks: A Guide To Stock Market Investing For Beginners, available on Amazon.
Enjoyed this advice? Share it!
Keep up with the top stories from Reader's Digest by subscribing to our weekly newsletter.
This post contains affiliate links, so we may earn a small commission when you make a purchase through links on our site at no additional cost to you.