Why Invest In Stocks

Done correctly, investing in stocks represents a way to generate healthy investment returns. It is considered an effective way to profit from the growth of the economy. Historically, stocks are shown to provide a superior return over fixed income instruments such as U.S. treasury bills and term deposits.

What Is A Stock

A stock or a share represents ownership in a corporation. The reason why a corporation issues shares is to use the proceeds to finance business growth. By becoming part owner of the company, the investor is now a shareholder. As a shareholder, the investor is entitled to the following:

• The right to vote on important matters of the corporation. These matters include accepting a buyout offer and voting in members to the company board of directors.
• Participation in the prosperity of the corporation. If the company does well, the value of its shares will go up. Shareholders might also receive dividends paid out by the company.
• Limited Liability: In a worst case scenario, the shareholder only loses what they have originally invested in the corporation. The company's creditors cannot go after the shareholders to recover funds.

Types Of Stocks

There are two types of stock:

Common Stock: This is the most commonly held stock by individuals. Common stocks give voting rights and the right to participate in dividends. These stocks are actively traded between buyer and sellers. Investors buy these shares to take advantage of the company's good fortunes.

Preferred Stock : Investors buy preferred stock for its dividends. Dividends cannot be paid out to holders of common shares until the preferred shareholder is paid. However, the preferred stock holder has less voting rights than the common shareholder.

Stockbrokers

In order to buy shares, a trading account with a stockbroker needs to be opened. A stockbroker has seats on various stock exchanges where they buy and sell stocks on behalf their clients. There are two types of stockbrokers:

Discount Broker: The discount broker offers a no thrills approach to stock investing. They charge competitive commissions for executing trades. These brokers do not provide investment advice. A discount broker is ideal for the knowledgeable do it yourself investor.

Full Service Broker: A full service broker provides financial planning and investment advice for the investor. They will build for their clients an investment portfolio that suits their investment criteria. Their fees are based on a percentage of the funds under management or a commission is charged for a trade.

 

Considerations

Picking the right stocks for investment involves asking the right questions. The quickest way to lose money is buying stocks on impulse and not doing the necessary research.

 

• Investment Objectives: You must first determine what are you investment objectives. Are you looking for growth, income or safety of principal?
• Risk/Return: How much risk are you willing to assume in order to get that return? As the rule goes, the higher the desired return, the more risk that must be assumed. If you are putting emphasis on quality of life, you probably want an investment portfolio consisting of high quality low risk stocks that generate stable returns.

Conclusion

Stock investing is a profitable way of realizing your financial goals if done right. In order to make money, you must first know what you're buying and be aware of the risks the stock investment could entail.