What You Need to Know About Stocks and the Stock Market

By now, after following my advice on how to increase your income and reduce your expenses, you must have lots of money that is available to invest. You are probably wondering whether you should invest in stocks.

There are many different ways you can invest your money so your money can grow. Buying stock certificates is one of many different investment vehicles you can add in your portfolio as you build your wealth. It is very important to understand any investment that you buy. Before you buy any stock, you should know what it is. This hub provides some basic information about stocks and investing in the stock market.

A stock is an ownership in a company. When you buy stock, you become part owner of the company.

How Do Stocks Get Issued?

The company decides how much money it needs for its business needs, probably for acquiring a new company or launching a new product. Instead of asking for a million dollars from one person or entity, they, with the help of the investment bank, break up the amount into pieces, representing different shares of stock. At the initial offering, the company decides on a par value of each share of stock, and the number of shares that they want to sell based on the amount of money they need. The company can also choose to issue additional stock from time to time. Investors can choose how many shares of stock they want to buy based on the amount of money they have available.

Once the initial offering is finished, the company has the money, and investors own the certificates. The investor owns a part of the business, and can vote in its business issues. His vote is based proportionately on the percentage of stock he own in the company. The more he owns, the more his vote counts. Once the stock is out there, the only way to divest from the company is to sell the stock. Sometimes the company will buy back stocks, but most commonly the stock will be sold in the secondary market.

Stock Market

The stock is now a part of the secondary market. This is where most trading takes place. The shares will be traded, and exchange hands, as long as the company is in business, and as long as the company hasn't bought them all back. The investors will buy and sell the stock and the value of the stock will be whatever the market thinks it is worth.

In the past, when a person bought stock in a company, he would receive a stock certificate like one shown in the photo. This became an issue, though, because people could lose their stock certificate and would have to go through the expense of proving they owned the certificate and getting a new one issued. Also, some stock was traded so often, there was no way that a transfer agent could keep up with transferring the certificate over so many times.

Now, just like savings books are a thing of the past, shares of stock are not issued in certificate form. Yes, you can still get a physical stock certificate, but most people do not feel the need. It is much easier to see your investment on a statement you receive from your broker. As long as you are buying your stock from a reputable dealer, not having a physical stock certificate should not be a problem.

Since a stockholder is an owner of the company, they are entitled to a part of their profits. From time to time, whatever money is not used for business, or reinvested in the company, is distributed to the stockholders. The amount distributed to stockholders is called dividends. Not all companies issue dividends. Those who do, normally issue dividends on a regular schedule, such as quarterly.

You can choose to get your dividends by check in the mail or direct deposit. You can also ask your broker to reinvest the dividends. I recommend reinvesting dividends. In this way, the money will be used to buy more certificates at market value. Because dividends are usually not big enough to equal a whole stock certificate, you will get a fractional interest in a share of stock. These fractional shares will add up to whole shares over time and are treated just like regular shares.

The price of stock changes throughout the day and from day to day. A gain or loss is realized when you actually sell stock that you have bought. If you sold the shares for more than you bought it, you realize a gain. If you sold the shares for less than you bought it, you have a loss. Any fees you paid to your broker to buy or sell your security does not count in this calculation.

Broker - someone who buys or sells securities on behalf of their client

Initial Offering: is the sale of the first stock by the private company to the public.

Investment Bank: the bank or financial entity that serves as an intermediary during the initial public offering. It provides advice and assistance to the company, and sells the certificates to the initial investors.

Par Value: The nominal stated or face value determined by the issuer of the security. The par value is usually printed on the certificate, but does not indicate the worth of the security.

Secondary Market: a market where investors can buy and sell securities and assets with each other instead of with the company. NASDAQ and the New York Stock Exchange are secondary markets.

It is important to fully understand any investment vehicle before putting any money into it. This article has provided an overview of what stocks are, some important terms, and some basic information about owning shares of stock.