How to invest in stocks
Stocks are a good place to start trading as they are easy to understand. Each stock represents a share in a real company, often one you already know. They also have plenty of available data, news, and analysis, making it easier to learn how prices move and what can affect them.
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What are stocks
Stock is a security that gives you partial ownership of the company that issued it. The ownership stake is determined by the number of shares you hold relative to the total number of shares outstanding.
Companies issue stocks to raise capital to support their operations and grow. As the value of the business rises or falls, so does the value of its stock.
After a company goes public, its stock becomes available for investors on exchanges. To track all initial public offerings, listing dates, number of shares, and more related details you can use the IPO calendar.
Stocks vs bonds
Most portfolios include a mix of both stocks and bonds, as each plays a different role in balancing risk and return.
Buying stocks means owning a portion of a company. When you buy a bond, you lend money to a government or corporation in exchange for regular interest payments and the return of principal at maturity. In the event of bankruptcy, creditors have legal priority over other stakeholders and are paid first.
Stocks
- Higher potential returns and long-term growth through capital gains
- Greater volatility and higher risk
- Traded primarily on stock exchanges
- Shareholders are owners of the issuing company
Bonds
- Steady predictable income through interest payments
- Less volatile and less susceptible to risks
- Traded primarily over the counter (OTC)
- Bondholders are creditors of the issuer
Types of stock
There are two main types of stock: common and preferred.
Common stock
Most publicly traded stocks are issued as common stocks. They represent ownership in a company, give holders voting rights, but dividends are not guaranteed.
The value of common stock is influenced by the company's performance, as well as by market supply and demand. It offers investors the potential for capital appreciation and long-term growth since its price fluctuations are more significant than preferred stock.
However, if the company liquidates its assets, common stockholders have the lowest claim on assets. Bondholders, preferred shareholders, and other creditors must be paid first.
Preferred stocks
Unlike common stocks, preferred stocks offer higher dividend payments and liquidation preferences to shareholders. However, preferred stocks typically don't provide voting rights.
Preferred stocks combine features of bonds and stocks. Like bonds, they provide a predictable flow of income through regular dividend payments, which are made before dividends are paid to common shareholders and are typically higher.
Preferred stocks have a fixed stated value, and their market price is affected by interest rates. When interest rates rise, the value of the preferred stock falls, and vice versa.
The price of preferred stock is usually less volatile than that of common stock, which is influenced by company earnings, growth prospects, and industry developments.
How stocks generate income
You can earn money from stocks in two primary ways: dividends and capital gains.
Dividends
Dividends are payments a company makes to its shareholders from its profits. For example, the Coca-Cola Company pays a regular quarterly dividend. If you own 100 Coca-Cola shares and the company pays a dividend of $0.53 per share, you will receive $53 in dividend income for that quarter.
Capital gains
Capital gains occur when a stock increases in value and can be sold for more than its purchase price. For example, when Nvidia went public in January 1999, its shares traded at around $0.03 on the first day. At the time of writing they are trading at $194.83 per share. A total lifetime appreciation is roughly 649% since listing.
How to buy stocks
Before placing any trades, make a thorough analysis of the stock you want to buy. Explore its fundamentals, such as revenue, earnings, and valuation ratios, and use technical analysis tools.
You can also use the Stock Screener to filter companies and Fundamental Graphs to explore financials.
Then, compare brokers available on TradingView and choose the one you like the most.
If you are not ready to trade with real money, you can start with paper trading — a risk-free trading simulator, helping you get the basics of trading.
Also, a good practice is to monitor your investments with portfolios.
While stocks offer the potential for higher returns, they are also exposed to market risks. Economic shifts, sector developments, and geopolitical events can cause volatility and potential losses.
The bottom line
Stocks are securities that represent partial ownership in a company, offering higher return potential. Companies issue stock to raise capital for growth, expansion, or other business initiatives. The rights and benefits shareholders receive depend on the type of stock they own.
All investments involve some degree of risk. The value of your investment can rise or fall due to economic developments or company-specific events. Historically, stocks have generated stronger long-term returns than many other investment types.
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