Strengthening Your Financial Toolbox Series: What is A Stock?
Many people are looking for ways to increase their financial literacy, but it can be overwhelming knowing where to start. In our experience, investors with some degree of familiarity with basic investment concepts have better long-term results and reduced anxiety when the markets are volatile. We like to look at major investment categories like tools in a toolbox. You first need an understanding of the financial planning goal so you know which tools to select for the job. In our toolbox series, we will cover several of the investment tools available and highlight what role they may play in your financial plan. As you know from the DYI projects at you your home, having the right tool can make the job go much smoother. The first investment tool we will be covering in our toolbox series is stocks, so let’s jump right in.
What Is a Stock?
You’ve probably heard the word “stock” numerous times in your life, but what really is it? A stock represents ownership in a publicly-traded company and when you buy a company’s stock, you become part-owner of that company.
How Do Stocks Work?
Now that we have an understanding of what a stock is, let’s get into how stocks work. Companies sell their stocks to obtain more funding to grow their business. When a company first issues stock to the public it is called an initial public offering or “IPO”. Most stocks that trade daily are not bought from the company in an IPO but rather bought from other investors that own the shares. As an owner of the company’s shares, you have the ability to buy more or sell your shares on the stock market. The price for a stock is set by the last price of the shares traded between a willing buyer and seller. The decision of whether to buy or sell a company’s stock can be driven by numerous factors such as the current economy, company earnings, the news cycle, interest rates, industry performance, and even the personal circumstances of the buyer or seller.
Should You Buy Stocks?
If you’re new to the world of stocks, you may be wondering, should I even buy stocks? Well, taking part in the stock market can have many rewarding benefits, but there are also risks involved. Ownership of companies that are innovating and meeting the needs of customers has proven over time to be a solid way to build wealth. All companies are not successful in doing this, however, so there are risks that your investment will not perform as well as you hoped. Owning a diversified mix of stocks can help spread the risk across many investments, potentially reducing risk and volatility. Another benefit of investing in stocks is the potential to earn income from dividends. As a part-owner in the company, you get to take home a share of the profits. Dividends are quarterly payments distributed on a per-share basis out of a company's earnings. For example, let’s say a company you have invested in chooses to issue $1 per share dividends to its stockholders and you own 50 shares, that’s another $50 in your pocket.
How Do You Purchase a Stock?
Stocks are most commonly bought and sold on stock exchanges such as the NASDAQ or the New York Stock Exchange. There are many ways to go about purchasing stocks, but typically investors use a brokerage account to purchase stock on the exchange, which also provides quotes for the company’s share price. Furthermore, many people seek out assistance from experienced professionals with in-depth investing knowledge, such as financial advisors.
Are Stocks the Right Tool?
You might be asking yourself if owning stocks might be the right tool to use in your financial plan. A financial plan can have many goals requiring multiple strategies to execute it properly. Generally, stocks are best used for long-term goals that will benefit from higher growth rates that stocks may provide. Because of the volatility of the market, stocks are not the proper investment tool for short-term or emergency fund goals. It’s extremely important to match your investment job up with the proper tool for best results.
Schedule A Consultation with an Experienced Financial Advisor
Here at Fourth Avenue Financial, our first priority is your overall financial success. We want to help you develop, implement, and monitor a strategy that’s designed to address your individual situation. If you are ready to start planning for your financial future, we are here to help. Contact us at today (304) 746 7977 to schedule a meeting with one of our experienced financial advisors or schedule your meeting online at https://calendly.com/fourthavenuefinancial/introductory-zoom.