To new investors, the stock market can seem mysterious and intimidating. Many people hear that buying stocks is risky, but they like the potentially high investment returns. Fortunately, there are some ways to make money investing in stocks that significantly limit your risk.
Just about every investor should own some amount of stocks, even during times of market volatility.
Just about every investor should own some amount of stocks, even during times of market volatility. I'll explain how to invest in stocks when you have little experience or money. You’ll learn the pros and cons of stocks and the best ways to own them to build wealth safely.
What are stocks?
Stocks are intangible assets that give you ownership in a company. That’s why they’re also known as equities or equity investments. Owning stock entitles you to part of a company’s earnings and assets.
Let's say a company needs to fund groundbreaking research, open a division in a foreign country, or hire a crew of talented engineers. Companies issue stock to raise money from investors for these types of ventures—it’s that simple.
Publicly traded stocks are bought and sold on exchanges such as the NASDAQ or the New York Stock Exchange (NYSE). However, you can trade them only through a broker or investment firm.
When a stock increases in value, it’s called "capital appreciation." That’s a fancy way of saying that the price goes up. As I'm writing this episode, Facebook and Apple stock are selling on the NASDAQ exchange for $266.12 and $469.51 per share. Visa and Walt Disney stock are selling on the New York Stock Exchange for $202.41 and $127.92.
If you buy Visa at $202.41 per share and the price goes up to $210, you can sell it for a gain of $7.59 ($210 - $202.41). You can easily find current stock price quotes on sites like Google Finance and Yahoo Finance.
In addition to capital appreciation, some stocks also pay a portion of company profits. If so, it’s called a dividend stock and distributes dividend payments to stockholders. For instance, right now, Discover pays a dividend of $0.44 a share. If you own 1,000 shares of Discover, you'd be paid $440 in dividends over a year.
Dividend stocks pay you even when the share price goes down, so owning them is smart to hedge against potential market losses. You can find a list of dividend stocks on a site like Morningstar.
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