You might hear about stocks or the stock market either from your friends, colleagues, or from both. Some people may say it’s just gambling(100% they’re wrong) and others are like it can be the biggest wealth-builder if you invest properly.
You will be surprised to know that your Rs.1 lakh invested for 13 years in page industries would be worth today nearly Rs.1.8 crores. If you know the stocks well and understand them properly, it can turn into the biggest wealth builder for you.
Because it can give you a high return, it also comes with risk, therefore, understanding stocks before investing in them can prevent you from making losses.
What Are Stocks?
Stocks are shares in a company that represents an ownership right in the company’s assets. Also known as equities and shares. You become a partial owner of the company after buying the shares. You are also entitled to receive dividends and take benefit of the price appreciation of the stock.
As I say you become a partial owner of the company, it doesn’t mean you have to go into the company and run day-to-day operations. Owning stocks of the company means you’re trusting the company’s management to run the business efficiently.
Why Do Companies issue Stocks?
When the company wants to expand its business, they need money. They can get money through either issuing stocks or debt. The company decides to issue stocks when they don’t want the burden of obligation to pay the money back.
When the private company first sell their shares to an investor, it takes place in the primary market. A company makes an initial public offering of shares when it sells the shares to the public for the first time.
Investors buy those shares and the money of investors directly goes to the company to grow its business. Later, if an investor wants to sell shares, they trade in the secondary market. In the secondary market traders trade among themselves. In India, it is famous as the stock market.
Kinds of Stocks
The company can offer various types of stocks. Although the main type of stocks company issue is common and preferred stocks.
Common stock represents ownership rights in the company. It is the most common type of security that companies sell to public investors. Investors of the company can participate in annual meetings through voting rights and have claims on the company assets in the case of liquidation.
Voting rights provide investors with the opportunity to participate in the company’s major decisions, such as the election of its board of directors, selection of the outside auditors, and decision to merge or take over another company.
It has both features of bonds and stocks. Preferred stock also represents ownership rights in a company. But it ranks above common shares in the payment of dividends and claims on a company’s assets in liquidation/bankruptcy.
However, preferred shareholders typically do not have any voting rights. Dividends on preferred stock are fixed and generally higher than dividends on common stock.
Other Types Of Stocks
These are stocks that you find in the stock market based on characteristics.
Value stocks are shares trading undervalued in the market relative to the company’s fundamentals. These are the most famous stocks amongst investors. For example, suppose the company XYZ has the actual value of a stock is Rs.1000 relative to its fundamental. In a market, the stock is trading at 600. Then the stock is called undervalued.
Blue-chip stocks are the largest company, with an excellent reputation, growing consistently but typically slow and in the industry with more than two to three decades. These companies often pay dividends to their shareholders and are the safest investment than all other categories of shares.
Growth stocks are mostly younger companies growing at more than the market average rate. They do not pay dividends because most of the profit companies reinvest in their business. Here your most of the profit comes from the price appreciation of the shares.
To know more about stocks types: 8 Types Of Stocks, Choose The Best For You
How Do You Make Money In Stocks
There are two most common ways to make money in stocks: Price appreciation and dividends.
Price Appreciation: When in the stock market, the company share price increase from your bought price, you make a profit. The difference between bought and sold price is y
our profit. In a nutshell, buying low and selling high is a key investments strategy here.
Dividends: Dividends are profits attributable to shareholders based on the number of shares owned. The dividends are not the legal obligation of a company. Depending on the company’s profits, the board of directors will decide whether to pay dividends or not.
The companies that pay dividends at regular intervals are known as income stocks. These stocks are best for people who are seeking passive and steady income.
Other Ways: You also can make money when the price of the stock goes down through short selling.
How to Invest In Stocks
In two ways you can invest your hard-earned money: Directly or Indirectly.
Directly: Directly when you invest all by yourself. You open the online brokerage account, research the company you want to invest in, and only invest when you found the company’s fundamental position is good. Moreover, after buying shares, you track your portfolio and make all decisions about buying and selling.
Indirectly: You may know about mutual funds and ETFs beforehand. Investing through them is called indirect investment. Where the fund manager does all the work for you with just a minimum of 0.1 or up to 3.0% of fees.
The main thing about investing these days is you have so many ways to do it whether you do it your own, or invest on behalf of some experts. Stocks come with a significant risk that an investor should be aware of. Therefore it is important to understand before investing in shares. If you neglect this phase then you end up making a loss in shares.
If you’re interested in learning about investing, shares, cryptocurrency, bonds, company analysis and other types of securities then make sure you subscribe to the newsletter so that you can build your investing literacy.