Why You Should Buy Stocks

Throughout the decades, investing in stocks has proven to be a popular and reliable way of accumulating capital or generating dividend income. Before getting started, though, there are …

Stock Trading

Throughout the decades, investing in stocks has proven to be a popular and reliable way of accumulating capital or generating dividend income. Before getting started, though, there are plenty of factors to consider.

Investing in stocks

 

In simple terms, a share of stock represents an ownership stake in a public company. A company decides to “go public” in order to raise capital for their business. In an initial public offering (IPO), a company, with the help of a principal underwriter, decides how many shares they want to issue, and at what price. Once those shares are issued, they trade on exchanges such as the New York Stock Exchange. This is how most stocks in the US are traded.

Once a stock is trading on an exchange, the price of that stock is determined by supply and demand. If investor sentiment is high, the price will go up. If investors are not so optimistic, the price will decline.

Different types of stocks

There are several ways to categorize stocks. Whether a stock is domestic or international is a good place to start. This tells us whether the company is in the country where the investor resides in, or somewhere else in the world.

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Market capitalization, or “market cap”, is another factor to consider. A company’s market cap is the value of all of the company’s outstanding stock. You can use this as a general indicator of the size of a company. Stocks with a higher market cap tends to be more stable and mature, while small-cap companies tend to be newer and more volatile.

Finally, consider whether a stock focuses more on growth or income. If a company focuses on growth, they are reinvesting their earnings into efforts to expand the company’s business. These stocks present the most potential for capital gains.

On the other hand, larger, more mature companies may not prioritize growth, but may instead pay their earnings out to investors in the form of dividends. These are income stocks.

How to get started investing in stocks

Once you have the capital needed to start investing in stocks, you will need to open a brokerage account. You can do this in person with a financial professional, but setting up an account is incredibly easy to do over the internet with an online brokerage firm.

Deciding on which firm to invest with can be overwhelming, but you can narrow things down by considering what services you need. Full-service brokerage firms offer benefits such as access to research and a robust support department. However, if you do your own research and just need the basics, you might want to consider a limited-service broker-dealer. Not surprisingly, the amount of services a firm offers usually affects the cost of doing business with them. A large number of firms don’t charge anything at all.

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When setting up your account, you will need to decide on the tax treatment you desire. The first question you will need to answer is whether you will use this account for retirement savings. If the answer is “no”, then a non-qualified brokerage account may be the best option. These accounts allow you to withdraw money at any time without restriction. They also require that you pay taxes on earnings in the year they are realized.

If you have long-term investing goals, then an individual retirement account (IRA) may suit you. There are two main types of IRAs: traditional and Roth. In a traditional IRA, you actually get to deduct account contributions from your taxable income. Gains accrue on a tax-deferred basis, meaning you pay no taxes until funds are withdrawn. In a Roth IRA, contributions are not tax-deductible, but withdrawals taken in retirement are tax-free. In both types of IRAs, withdrawals taken prior to age 59 ½ will be subject to an additional 10% IRS penalty.

One you decide on tax-qualification, you can decide on which stocks to buy. You instruct your brokerage firm on what shares to buy, and in what quantity. Once those shares are yours, you can watch their values fluctuate – and hopefully, increase – until you are ready to sell.

Conclusion

Investing in stocks may seem overwhelming at first, but once you get your account up and running and decide on your investment objectives, the results can be rewarding – and profitable.

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