Investing allows people to commit currently available resources to an endeavor that may retain value or generate additional value in the future. The investing mindset is a low time-preference mindset. It requires the willingness to forego present consumption for future benefits.
Investments may result in profits or losses. Higher-risk investments may yield more profits, but they are more likely to fail. Lower-risk investments are less likely to result in losses, but they produce smaller profits.
You can invest your money in many ways.
- Retirement plans
- Mutual funds and ETFs
- Savings for education
- Interest-carrying banking products
- Commodity futures
- Cryptocurrencies and initial coin offerings
What are Stocks, and Why Do Investors Buy Them?
Stocks are securities that give their holders ownership of the company that has issued them. If you hold a stock, you own a bigger or smaller part of the issuing company, depending on how many shares you have.
The terms “stocks” and “shares” have an almost similar meaning.
- Stocks refer to the shares of several companies. Owning five stocks means owning shares in five different companies.
- Shares refer to equity in the same company. If you state that you own 100 shares, you imply that they are shares of the same company.
Companies issue stocks to raise capital from investors for various purposes. They may want to expand into new markets, launch new products, etc.
- The company does well, increasing the price of its shares. This way, your investment appreciates.
- If you have enough shares, you may influence the company through voting.
- Your shares may earn regular passive revenue in the shape of dividend payments.
Types of Stocks
Investors can buy two types of stocks: common stocks and preferred stocks.
- Common stocks give investors the right to earn dividends and vote.
- Preferred stocks carry no voting rights. However, they give their holders priority regarding dividend payments. If the company goes out of business, owners of preferred stocks get paid at liquidation before the holders of common stocks.
From the investors’ perspective, stocks can also be:
- Blue-chip stocks. These stocks grant ownership in well-established companies with a well-known public track record.
- Penny stocks. These stocks are high-risk equities granting ownership in newly-launched, tiny companies. Penny stocks have historically attracted shady peddlers and clueless buyers.
- Income stocks. Income stocks may not appreciate as quickly as growth stocks, but they provide a reliable income for investors through dividends.
- Growth stocks. The value of these stocks goes up faster than the market average. They seldom pay dividends, but they attract investors because they appreciate quickly.
- Value stocks. These stocks offer good value because they are cheap to buy and have decent fundamentals that give them good future potential. A value stock may be cheap because of an unexpected economic development. The markets sometimes overreact to news and trends. Such overreactions create value in the stocks of some companies.
How Can You Invest in Stocks?
If you want to give your future self a gift in the shape of a preferably profitable investment, you have several options.
- Consider a full service or discount broker. Brokers buy and sell the shares of scores of companies. A retail investor cannot access nearly as many stocks as a licensed stockbroker. Although brokers make it easier for retail traders to invest, they charge a fee for their services. Most brokers offer convenient apps, read on about stock trading apps.
- Do the heavy lifting yourself. Some organizations allow you to buy their stocks directly. Although you can acquire such stock without the help of a broker, you will likely have to turn to a broker to sell the stock. Direct stock plans don’t allow everyone to buy stock. And they come with limitations regarding the buying time and the stock price.
- Reinvest your profits. If you earn money off dividends, some companies may allow you to automatically reinvest your earnings. You can snowball your investment this way. To reinvest your dividends you have to sign an agreement with the stock issuer.
- Expand your exposure. Stock funds, mutual funds, index funds, and ETFs (exchange-traded funds) allow you to invest in a selection of stocks instead of a specific company. By investing in a stock fund, you automatically diversify your portfolio without having to worry about each of the constituents of the fund.
Investing carries risks and involves fees. Make sure you understand the risks and fees before you pour money into stocks. Also, educate yourself on the laws governing stocks and investments.