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Investing in stocks is a great way to build long-term wealth and make your money work for you. However, the stock market can be a confusing and daunting place as a beginner investor. How do you know which stocks are good to buy and how to measure your returns?
Let’s dive into what stocks are, how they work, and how to get started investing in stocks as a beginner.
What is a stock?
A stock is a type of investment. Companies break up the value of their business into pieces, called shares. When you invest in a company’s stock, you purchase shares.
People who have purchased company shares and benefit from future profits are called shareholders.
How stocks work
Stock prices reflect the perceived value of a company, as well as its actual growth or decline. Growing companies usually look better to investors because their stock values will probably grow over time.
There’s a higher demand for companies that are doing well, which raises their stock prices. When a company struggles, its share prices go down.
Making money off stocks
Owning stock is an investment, not liquid cash. This means you cannot spend the money you invest into stocks shopping or for other everyday needs.
Stock investments may take years to make a return on your money, if they do at all.
Make no mistake: investment is a risk. You can offset the risk by learning as much as you can about the market and the companies you invest in, but you’re never guaranteed to break even, let alone a return on your investment.
There are two ways to make money off stocks you’ve purchased:
- If a stock you own increases in value and goes up in price, you can sell it for a profit.
- As a shareholder, you may be entitled to dividends. Dividends are profits that you earn based on the percentage of your ownership of a company through your stocks.
If you can receive dividends, you’ll usually receive them at the end of each financial quarter.
6 steps on how to invest in stocks
Ready to buy? You’ll need your bank account information and cash to spend.
After your information is ready, here’s what’s next:
1. Choose an online brokerage and open an account
Stockbrokers are middlemen between companies selling shares and investors buying them.
In the past, investors used to hire stockbrokers to do buying and selling for them. Now, most brokerage can be done online without paying a professional to advise and manage your collection of stocks, also known as a portfolio.
Setting up your account is similar to applying for a regular bank account. You’ll need to provide ID and connect a form of payment to get started.
- Find a manageable investment minimum.
Brokerages often require an investment to get started, although there are many that don’t.
- Check commissions costs and management fees.
Brokerages charge you fees for actions you take in your account. Commissions costs charge you per trade or share sold, and management fees are charged annually as a cost to run the account.Make sure to compare the fees and costs before choosing your brokerage.
- Look for promotions.
Like banks, brokerages run sign-up specials like cash bonuses or periods of free portfolio management.
2. Decide what you want to buy
Next, you’ll need to choose stock to buy.
Read public earnings reports and recent news to see if you can judge a company’s growth potential.
Also, consider the industry, how the company makes money, as well as the age and relative stability of the business.
Choose companies you feel good about investing in and understand—after all, you’re buying a little piece of their future.
3. Choose how much to spend
Stocks prices can range from under $50 to thousands of dollars apiece.
Don’t feel pressure to spend a lot. You can start by buying just a single share and going from there.
4. Place your order
When you’re ready to purchase a stock, you’ll be asked for your order type.
Starting out, use market orders. A market order means you want to buy or sell a stock immediately at the best available price.
5. Set goals and wait for results
Your investments will perform best if left alone for several years, but you can set goals for your money in the meantime.
Your brokerage will routinely report details on your stock portfolio and which stocks make high returns.
Many new investors work with a robo-advisor, which is basically a computer program that automatically conducts trades based on market conditions. That way they know their money is always working.
6. Get your money and pay taxes
Selling stock is about minimizing losses and improving returns. It’s a best practice to hold new stock for five years before assessing whether to sell.
If you decide to sell, your brokerage initiates a regulated three-day waiting period, then you’ll receive funds via direct deposit (if connected to your broker).
If you made money on the sale, you’re required to pay capital gains tax, a percentage of your total profit. The amount you’ll pay depends on your income bracket.
Investing in stocks can be overwhelming when you’re starting out. It’s important to remember that investment is always a risk. Never invest more than you can stand to lose. And remember: more research will never hurt you.
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