Investing money has been known to have enormous payoffs as seen with the world renowned Warren Buffett, he is the mentor that some investors look up to and hope to replicate his achievements. Before anyone can throw money into the market or any investment vehicle for that matter, it is critically important to gather information. This article will go over the basic questions one may have when first becoming intrigued about the subject of investing. While there are many ways an individual can invest their money (mutual funds, offshore high interest accounts, equities, dividends etc.) this article will primarily be covering equities.
What Is A Stock?
A stock is simply having ownership of a company which is also known as stock, share, or equity. This represents a stake in the company’s assets and earnings, when an individual accumulates ownership in the company there share or part of the asset increases.
Being A Shareholder
Holding stock means that you are a owner of the company, in most cases, usually very small. While being a shareholder the individual is entitled to earnings and based on the amount of stock that is possessed the shareholder is entitled to voting rights for the equity. Stocks are issued via certificates, this is a piece of paper that indicates that you have “x” amount of ownership in the company. With technological advancement you are no longer issued a certificate per se however, your brokerage keeps the certificates in a database in cyberspace. By having shares in virtual accounts makes the trading of the equity much easier and simplistic because it only takes a click!
Why Does A Company Issue Stock?
A company issues stock because it needs to raise capital, in order to do this the company can borrow the money at interest or quite simply, they can sell a portion of the company know as issuing stock. Issuing stock can have many advantages because it does to require that the company repays the money back and the best part is all that money is interest free. But what about the shareholders? They get their investment back in the form of dividends and hope that one day the company will be valued higher than what they originally purchased it for.
Debt Financing vs. Equity Financing
Buying a debt investment (bond) you are guaranteed the return of your money with the interest payments that were outlined. When dealing with an equity investment you are accepting the risk that the company may not be successful, and the return of your principal is not guaranteed. So, if the company tanks and is all of the sudden bankrupt, you do not get a cent until the banks and creditors are awarded their money first and by that time there may not be enough money left to reimburse the shareholders. However, it is possible to have the tables turned if the company does well and becomes successful you can sell your share for a profit, or continue to reap the benefits from the dividend. It is wise to do your homework and get a broad understanding before you make an investment.
When investing nothing is 100% and the market is forever changing, for every company that pays out dividends there are also companies that do not and there is no stipulation that requires a company to pay dividends; even if the company has been doing it for years. Is it possible to make money without collecting a dividend? Absolutely! This is done through trading equities which is buying shares and selling them at profit. However, before investing it is good practice to seek out the company's appreciation on the open market (current trading value of the company and past earnings). While investing may deter many individuals it can be a fantastic vehicle to create wealth although, the opposite can be true too. It has been documented that stocks have outperformed various other types of investments such as mutual funds, savings accounts, and even bonds each and every year. It is stated that the historical return on investment ranges between 10-12% annually. This indicates that there is money to be made in the markets but only for those who do their homework and actually put money on the table.
Honing Investment Skill
In the beginning it may seem daunting to put real money on the table, especially being new to the investment game. Being in this technological age, we have tools in place that can help even the most skillful trader tighten up their game. While conducting research it is good practice to use mock trading accounts, these are online trading platforms that act as real trading accounts. You can use virtual money and place trades as if it was a legitimate trading account; the only difference is you don't lose your precious savings and you don't gain if you place good trades. These are great because anyone can become familiar with market trends, understand how the markets work, and the overall competence of market fluctuations. To test drive one of these trading simulators you can hunt around on Google, there you will find dozens of them and the best part is they are free. Simply sign up with your email andgain direct access to real-time simulated trading.