How to Understand Stocks & Shares
Shares and stocks are words used to describe equity. When you buy stock in a company, you are buying a share of its equity, which is why stocks are also referred to as equities. Share is sometimes used interchangeably with stock, but that is not accurate. Understanding investing begins with learning what shares are and how they relate to a company.
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Instructions
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Start reading the "Wall Street Journal" or the business section of your local newspaper and finance resources online at websites like Google Finance (see Resources). These and other references will give you important information on how stock markets function and what shares represent.
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Study financial statements. Companies listed on major stock exchanges are required to release quarterly financial statements that include a balance sheet, income statement and statement of cash flows. Understanding these important documents is not difficult if you understand basic budgeting. They reveal if the company is profitable, how much debt it has and how much cash it has on hand to pay its debts and invest in new products, services or technologies.
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Buy shares in a company you believe will be profitable. Companies list stock (a portion of its equity) on exchanges in order to raise capital for future expansion. The public has an opportunity to buy shares of the company's stock. These shares give the shareholder certain rights, for example, voting and asset claims.
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Research different kinds of stock. There are two major types of stock: common and preferred. Common stock gives the shareholder the ability to vote on company decisions and to receive dividends if the company apportions them. Dividends are a form of profit sharing with shareholders and are usually given out quarterly.
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Understand the risks. Investing in stock is also about risk. There are different kinds of companies: small, large, financial, industrial and telecom, for example. Some companies are well-established and give out dividends without fail. Others are small start-ups that may have a lot of potential but are also risky to invest in because they are not proven. It is important to understand what your financial goals are when investing so you can match them with your stock investments.
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