- When you buy shares of stock you become part owner of the company that issued the shares. This entitles you to a dividend on your shares if the company pays one and in most cases means you can vote at the company's annual meeting. If the company makes a good profit the value of your shares is likely to rise. If, on the other hand, profits decline or the company loses money you can suffer a loss when the price of the shares you own falls. Unlike a bonk savings account or CD the value of your investment is not insured. The big attraction of investing in stocks is that you have a good chance of making a higher return on the money you invest than with CDs or savings accounts.
- There are two basic types of stocks: common and preferred shares. Which you invest in depends on what your financial goals are. Preferred stock is more stable in price and usually has higher dividends---in fact, many companies pledge to pay dividends first out of any profits. In addition, in the event the company fails, preferred stockholders are paid first from any assets remaining after creditors are paid. Preferred stocks don't always have voting privileges and are less likely to rise in value. They are good choices for the person who is looking mainly for income. If your financial plan calls for building the size of your stock portfolio, you will probably want to focus on common stocks. Typically common stocks pay smaller dividends but are more responsive to the company's fortunes and market conditions and offer the chance of excellent growth.
- One important benefit to investing in stocks is that they can offer some big tax advantages. The profit on long-term investments is subject to capital gains tax rates that are lower than those for regular income. If you open an Individual Retirement Account (IRA) this gives you an additional tax shelter for stock investments made within the IRA.
- There are three common ways to invest in stocks. You can purchase shares through a bank, which appeals to many people because they can deal in person with people they know and transaction fees are modest. For people who lack the time or knowledge to choose individual stocks, buying shares in a mutual fund is a good choice. Mutual funds are professionally managed portfolios of stocks and, while you need to research the fund before you invest in much the same way you research a stock, this avoids the work of choosing individual stocks. If you go this route, choose a no-load fund (one that does not charge a portion of your investment up front in addition to other fees). Experienced investors who do their own research usually choose to open an account with a discount broker that charges low fees. Many will let you open an account and make transactions online, adding convenience to the low cost of making stock transactions. In most cases mutual funds or discount brokers will require a minimum initial deposit of around $1000 to open an account.
- Before you invest, educate yourself about the companies you are interested in and the industry they are in. Go to the company website and look at the reports and information in their Investor Relations section and order a copy of the company's annual report. Check the company's stock performance over the last few years. The best choices are companies that outperform market averages (such as the Dow Jones average) and that have good future prospects for growth and profitability. Watch for changes in the company's management as well---such changes can be a sign of better times ahead or a warning of trouble.
