Stock market investments are great for wealth creation in the long run. It is an art to learn how to invest and be patient enough to wait for the returns. But before you begin to look at it as a source of passive income, it is important to learn how it works and how you can align your investments with your financial goals at Multibankfx.com.
What Are Stocks?
Stocks are essentially equity investments that indicate that the shareholder owns part of the company legally. Firms typically issue stocks when they want to raise capital for their business. There are two types of stocks, namely, common or preferred. A common stock gives a shareholder access to a certain proportion of shares in both profits and losses of a company whereas preferred stock has a predetermined dividend payment.
Investing in Stocks
Owning stocks can be profitable when share prices rise or when dividends are paid out per quarter. Investments could accumulate over the course of time and result in good returns thanks to compound interest due to which the interest you own, also begins earning interest. However, to actually make a considerable amount of money in the stock market, the key strategy is not buying and selling but rather it is buying and holding onto the stock to earn benefits in the long run.
Why Stock Prices Fluctuate
The stock market functions the way an auction operates. Buyers and sellers in the market could be individuals, corporations, or governments. The stock prices would fall when the number of sellers exceeds the number of buyers in the market while the price increases when the buyers are more than the sellers. A company’s performance may not be directly responsible for its stock price. How investors respond to the performance matters more in determining the fluctuations in the stock’s price. Naturally, there would be more takers for a stock of a well-performing company which would rally the prices up, and the opposite of this–where the company underperforms and thus the prices fall is also true.
Stock Market Capitalization
A stock’s market capitalization ( or “market cap”) refers to the sum of the total shares in the market multiplied by the share price. Market cap is much more relevant than the value of a share since you would be able to assess the company’s position against other similar firms in the industry. A small-cap company that has a market capitalization worth $500 million cannot be weighed against a large-cap company worth $10 billion. Typically, companies in the stock market are grouped on the basis of market cap:
- Small-cap: $300 million to $2 billion
- Mid-cap: Between $2 billion and $10 billion
- Large-cap: $10 billion or more
A stock split takes place whenever there is an increase in the company’s total number of shares. This is usually done by dividing up the present ones in a two-to-one ratio.
Let’s understand this better with an example–say you own 100 shares of a stock that cost $80 each. In case there were to be a stock split, you will own 200 shares priced at $40 each. Even though now you own more shares in terms of the total number, the value remains the same.
Stock splits could take place when the prices are soaring in a way that puts smaller investors at a disadvantage.
Stock Value vs. Price
A company’s stock price is not linked to its value. A $50 stock might be much more valuable than another $800 stock.
The equation between price-to-earnings as well as net assets helps in figuring out if a stock is overvalued or undervalued. Companies may try to keep the prices inorganically high by never carrying out a stock split without any underlying foundational support. It is wrong to make assumptions on the basis of price.
What Are Dividends?
Dividends are generally payments made in cash by companies to their shareholders. Dividend investing implies portfolios that have stocks that issue dividend payments steadily over the years. You can consider these stocks a good source of a passive income stream that can turn out to be a boon in retirement.
It is not right to assess a stock only on the basis of the dividend alone. Many times, companies tend to boost dividends so that more investors buy the stock. This is generally done when the underlying company is facing some financial issues.
Blue-chip stocks—named after the most valuable poker chip–are the ones that belong to renowned and well-established companies that are known for paying out dividends consistently no matter what the economic conditions are like.
Investors prefer them since their dividend rates increase faster than the inflation rate. A blue-chip stock owner’s income rises without having to buy another set of stocks. They may not necessarily be too frilly but rather are the ones with solid balance sheets and steady returns.
Preferred stocks are not the same as the common stocks that investors typically own. The ones who hold preferred stocks receive dividends on priority and would be paid first if the company files for bankruptcy. Preferred shareholders are not given any voting rights and the prices of these stocks also don’t fluctuate as much as common stocks.
Finding Stocks for Your Portfolio
There could be an investment idea lurking anywhere around the corner. You might want to opt for firms such as Standard & Poor’s (S&P) or other online resources which have details about the new and upcoming firms that would make great potential investments. You may want to check them out and research them in detail. that might tell you about up-and-coming companies if you want guidance from professional research services. Look around you and see if people are buying those stocks around you if online research is not something that you like. Keep an eye out for trends and for the companies which are performing well. You would be able to benefit from them. What may also help is taking a stroll around your grocery store looking for brands that are emerging fast in the market. Speak to your family, and learn about the products and services that they prefer and why.
Make sure you diversify your portfolio and invest in stocks from various companies that come from different industries with varying market caps. It is a sign of a good portfolio to have securities like bonds, ETFs, or commodities.