It’s likely you’ve heard all kinds of jargon related to stocks over the years. Even if you have a basic understanding of investing and the market, you might still wonder, how do stocks work, and what are the different types? Many people are still unsure about how penny stocks, dividends, and trading work.
Put simply, stocks represent ownership in a company. They are investment assets that allow investors to take part in a company’s profits. Here’s a closer look at stocks and how to get started investing.
Understanding How Stocks Work
Each unit of stock is known as a share. Owning shares of stock allows investors to share in a company’s profits if it performs well. Stocks may grow in value through price appreciation. They may also pay dividends to shareholders. It is important to understand that investments do not guarantee growth or the return of the original amount invested. They can lose value over time. Past performance does not predict future results.
You may also wonder, how do penny stocks work? As the name suggests, penny stocks are low-priced stocks, often trading under $5 per share. Like higher-priced stocks, some trade on major exchanges such as the New York Stock Exchange (NYSE). However, many penny stocks trade through over-the-counter (OTC) markets.
Here are some common terms to know when investing in stocks:
- Share Ownership: Buying stock means purchasing ownership shares in a company.
- Price Appreciation: When a company performs well, its stock price may increase, raising the value of your investment.
- Dividends: Companies with earnings may pay part of their profits to shareholders as cash payments.
- Compounding: Over time, earnings may be reinvested, allowing investments to grow at a faster rate.
Different Types of Stock Investments
Investors can gain exposure to stocks either directly or indirectly. A direct investment involves buying and holding shares of individual companies. Indirect investments are often made through stock mutual funds or equity-based exchange-traded funds (ETFs).
| Investment Type | How It Works | What You Own |
|---|---|---|
| Mutual Funds | When you buy shares of a stock mutual fund, you are investing in a collection of stocks managed within the fund. | Shares of the mutual fund, not the individual stocks |
| ETFs | These funds often track a market index. | Shares of the ETF, not the individual companies in the index |
6 Steps to Get Started Investing in Stocks
Investors can buy shares of stock through a financial institution. To begin, you will need to open an investment account. Once the account is open, it must be funded before purchasing stocks. Before buying, it helps to decide which stocks to choose and how much to invest.
Here are six steps to get started:
- Choose a financial institution: Options include online brokers, banks, mutual fund companies, and some insurance companies. Many investors use online platforms to research and buy stocks directly.
- Open an investment account: Common options include brokerage accounts, IRAs, 529 plans, and employer-sponsored plans such as a 401(k).
- Fund the account: Add money through an electronic transfer or another deposit method.
- Research and choose stocks: Stocks can be grouped by type, such as growth or value, or by company size, such as small-cap, mid-cap, or large-cap.
- Decide how much to invest: Stocks are usually bought by the share. For example, if a stock costs $100 and you want to invest $500, you can buy five shares.
- Place the trade and set a holding period: Buying or selling stocks is called a trade. This is done by submitting an order at the current market price. Many investors hold stocks for longer periods, such as 10 years or more, depending on their goals.
Bottom Line
Stocks represent ownership in a company and can be purchased through a financial institution. Their value may increase over time through price changes and dividends, but growth is not guaranteed. Investors often use stocks to support long-term goals and may seek guidance from a registered representative.
Footnotes
- Provided for informational purposes only. Not all products and services discussed are available through member of Western & Southern Financial Group.
