Stock Investment FAQ
Investors can purchase stock in publicly traded companies. Many of these stocks are traded over exchanges, such as the New York Stock Exchange, while others are sold broker-to-broker. While riskier than other, more conservative investments such as bonds, trading stocks has the potential to yield larger profits.
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Types?
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Stocks come in many forms. A share of stock is either classified as common stock or preferred stock. Common stock may pay dividends, which often are tied to the company's profitability. Preferred stock pays dividends at a set, guaranteed rate. Stocks are also classified based on the size of the company, the company's potential for growth and the sector of business it is in.
Price?
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The price of stocks fluctuates constantly based on supply and demand. Stocks traded on an exchange work on an auction model, in which the price moves according to bids made by buyers and offers made sellers. When a stock becomes more popular, its price goes up; when the stock is not in demand, its price goes down. Because each share represents an ownership percentage of the underlying company, the share price measures how much the market believes the company is worth.
Benefits?
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Investing in stocks provides a number of potential benefits for investors. Because of the enormous number of stocks available, investors have a wide range of choices about where to place their money. Investors can pick stocks based on their relative risk and their potential for reward. Stocks traded on exchanges are also very liquid, meaning they can be easily sold. Also, compared to many safer investments, stock investing has a greater potential for large profits.
Risks?
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Stocks are also considered a risky investment compared to assets in which a return is almost guaranteed, such as with certain bonds and money market funds. While investors can protect their investment by buying a diverse portfolio of low-risk companies, there is nothing to protect them from a marketwide downturn. For example, the Dow Jones Industrial Average, an index of blue chip stocks, lost almost 90 percent of its value over a span of three years during the Great Depression.
Considerations?
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When trading stocks, investors should keep in mind a number of expenses. Most brokers generally charge a commission on each trade, a fee that investors should factor in when calculating their potential profits from the sale of stock. Also, profits earned from the sale of stock are taxable; as of 2010, capital gains taxes in the U.S. stand at 15 percent. However, losses on the sale of stock are tax-deductible.
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