Stocks & Investing in a Nutshell: Stock Basics

Many people dream of being a millionaire, but they feel that it is only a dream that will never happen. Most of us fear retirement because we aren’t sure we will have enough money to support our standard of living. We are constantly seeking a way to become rich quickly. Becoming a millionaire (or at least living well after retirement) isn’t as hard as it may seem. YOU can retire comfortably, but it requires patience and careful planning. While it is difficult to get rich quick or beat the market, profiting from the stock market only requires mastery of a few simple principles. If you start early, the miracle of compounding interest (or compounding growth) could make you a millionaire with a minimal of effort. It just takes time.

There are many myths and misconceptions regarding the stock market. Often, people believe that they just have to get in on a "hot tip" or find a way to beat the system. There are many pitfalls involved with investing. Many brokers will try to sell you on the "hottest" stock by promising you will get rich immediately. Others will try to persuade you to buy a stock promising that the price will take off soon. Many "tips" may be hype spread by people with a personal interest in raising the price of their stock. If you understand the principles behind investing, you will not fall for hype. You will be able to make informed decisions that will enable you to profit from the stock market.

When a corporation wishes to raise capital, they will often issue stocks. When you buy a stock, you are actually buying a piece of the company’s net worth. You own a part of the company, and you will share in that company’s profits or losses. As a company grows, their net worth will grow. If you invest wisely, your stocks will greatly appreciate in value by the time you are ready to sell them. Generally speaking, you can expect an annual growth of ten percent per year from the stock market. Picking individual stocks can be extremely risky, but overall, the stock market has only appreciated in value.

Sometimes a company will offer dividends. You can either spend these dividends or reinvest them. Dividends are really a small part of the picture. Generally, you will invest in a company because you feel that they have a profitable future.

A stock’s price is basically the estimate of the company’s future worth. It is nearly impossible to predict how a stock’s price will fluctuate in the future because the process of evaluating a stock’s worth is extremely complicated. Generally, a stock’s price is the result of speculation based on a number of factors. A stock’s worth is decided by a large number of analysts. Many times, the price of a stock is almost arbitrary. The price is a reflection of many factors, and many parties’ opinions of how those factors will effect the future profit and worth of a company. Several internal factors can influence the price of a stock such as the company’s profit, changes in management, or the entry of a new competitor or technology. External factors can also affect the stock’s price. These could include an increase in the Federal Reserve Rate, inflation, new laws, or changes in government.

There are a few steps you must take before you are ready to invest in the stock market. First, you must be sure that you have money that you can set aside for investing. If you have high credit card balances, you should definitely pay these bills first. If your credit card interest is 18%, you are likely to benefit more from paying your debts than safely investing in stocks. You would be hard pressed to find such a guaranteed way to find an investment that would yield an annual return of 18%, especially after taxes. Second, you must choose your method of purchasing stocks. There are several different ways to trade stocks.

Buying stocks directly from the company: At face value, this option sounds good because you are eliminating the middleman. However, you should probably avoid this method of buying stocks. Often, the commissions or fees that you pay to buy stocks directly are comparable to the commissions that you would pay a broker. Also, you must fill out an application for each company from which you purchase stocks. If you buy stocks from several different companies, you will have several different sets of reports that you will have to read. It is generally more expensive and time consuming than buying from a discount broker.

Traditional brokers: Many investors use the services of a broker to purchase their stocks. Traditional brokers usually charge high commissions for each trade. So, you may wish to try a discount broker.

Discount brokers: There are many discount brokers that will help you to manage your stock portfolio. Be sure to select a reputable broker. With discount brokers, you will receive one report. You can make all of your transactions by contacting one person. There is still a fee or commission for each trade, but this method is more convenient and less expensive than buying stocks directly.

   1. Using an account with a discount broker Request an application via phone or Internet, fill it out and return it via mail or fax.
   2. Often, you will need to send a check. You may need an account with the broker.
   3. Call the broker whenever you wish to buy or sell.

Mutual funds: Many people decide to let a mutual fund manage their investments. The key advantage of mutual funds is that you have a full-time professional managing your investments. With some accounts, you can even write checks under certain conditions. Mutual funds are one of the most convenient ways to invest. Many of these funds offer IRA accounts that can significantly increase your yields after taxes.

Online trading: There are many new sites that allow you to be your own broker. For a nominal fee, you can trade anytime. Often, these online trading sites will provide other resources that will help you to trade.

Should you choose to buy your own stocks, you will want to research the companies that interest you. Stock prices are partially based on the health of the company issuing them. If you choose a financially healthy company, you are likely to profit. One of the most important numbers to review is the P/E ratio. The price to earnings ratio measures the price of the stock in relation to the company’s earnings per share. You should compare the P/E ratio of the company to the average P/E ratio within the industry. You can find the industry average P/E ratio in Standard & Poor. If the P/E ratio is excessively high, you should seek a good explanation. If a P/E ratio is excessive, and there is no good reason for the excess, then it is possible that once the Market undergoes a correction, the P/E ratio will fall! This means, the price of your stock will fall dramatically within a very short period of time. You should always evaluate a company’s financial statements before you invest. One of the most valuable tools would be the Value Line report. This report provides a great deal of useful information that will help you to invest wisely. You can find this report at your local library.