Investing in Stocks 101
Understand stock market terms and procedures to better navigate stock market investment. Investing in the stock market can be an engaging way to make money and support burgeoning businesses. Get familiar with the different terms and techniques used in the stock market to make sound investments and understand the real value of a company's stock.
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Identification
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Investors buy shares of stock at a stock market, the largest of which is the New York Stock Exchange. Types of stock include common stock and preferred stock. Most investors deal with common stock, the usual stock that makes up the bulk of the stock traded in stock exchanges. Preferred stock is a special type of stock that often comes with specific restrictions and payout benefits for preferred stockholders; companies sometimes use it to prevent a takeover by major stockholders.
Features
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Shares of stock are a type of investment called a security. When an investor buys stocks, she is making an investment that also comes with partial ownership of the company. How much of the company a stockholder owns depends on how much of the available stock she owns. This ownership comes with shareholder privileges like voting rights in some company board elections and some decisions.
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Function
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In the stock market, an investor can make a profit either by investing long-term in shares of stock to collect dividend payments from a company he believes will perform well (called buy-and-hold), or he can make short-term trades in shares of stock that he feels will change in price soon. Day traders are stock market traders who make money trading stocks quickly, sometimes buying and selling the same company's stock within the same day.
Making Money
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Most investors buy stock they believe will go up in value and sell it when the price is high. When stock is traded, it is usually through a broker that takes a commission on top of the sale. If the stock price goes up enough to exceed the cost of the commission taken by the broker, the investor will turn a profit when the price is sold. If the investor must sell the shares at a lower price, she loses the difference between the prices, plus any commission or fees she paid to conduct the trades.
Company Value
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Changes in share prices can give an investor a clue about how a company is performing in relation to its past performance, but the share price alone does not indicate the value of a company in relationship to other similar companies. This is because each company has a different number of shares on the market. Multiplying the current stock price by the number of shares on the market for the company is more likely to give an accurate representation of the current value of the company.
Considerations
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Some investors make a profit using a different approach called short-selling the stock. When an investor short-sells a stock, he is borrowing stock from a stock broker and selling it with the intent to buy it at a lower price later. Investors use this approach when they think a company's stock share price is about to drop. Short-selling is usually done by experienced stock traders who have credit with stock brokerages.
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