Stock Investing – What You Need To Know

10
May

The subject of investing in stocks is something most people have heard of. However, not everyone truly understands the fine points of such investing. This leads many to assume the subject is a complex one. Honestly, stock investing is a fairly simple subject to break down. Once people gain a basic understanding of what stock investing is, they may start earmarking a bit of their savings towards the market. And why would they not? The potential return on their investment makes this a wise move.

Before understanding what stock investing is, it is helpful to understand why a business offers to sell stock. In particular, we will be discussing publicly traded stocks on the open market. (The alternative would be privately traded equity investments) Such stock is issued from the company so that it can raise money. Issuing stock is a form of offering ownership in the company. By selling ownership in the form of shares, the company is able to acquire the liquid capital needed to operate its business. Unlike a loan, the company does not have to “pay back” the money. Again, minority ownership is sold via stocks.

The benefit that the investor gets is that the price of the stock will arise based on profits. Of course, there is also the potential for the stock to decline in value if the business falters or loses money. When the company is doing well and the value of the stock increases, the investor’s net worth increases as well. Stocks are liquid assets which means they can be sold at a moment’s notice. This can also prove helpful when a stock is declining in value as you can cut your losses and sell off the poor performing stock.

Please be aware of the fact that stock investing is considered a long term strategy. When you invest in a company, you are putting your money away with the intention of letting it grow with the increasing price of the stock. Those that wish to buy and sell stock at a rapid rate are called traders. Trading is not investing! Trading is a risky and volatile strategy that may yield huge profits and it is also known for yielding huge losses. Actually, it is the latter that it is more frequently known for. So, when you want to keep your money safe you should stick with long term stock investing. This is a much safer plan.

The key here is that over the life of the investment, you gain a better increase in the value of your investment than you ever would with a traditional savings or money market account. If over the course of 10 years the stock delivers an average of 8.7% return on investment per year, the investment was a fairly tremendous one. No bank is going to offer such a great return.

Just be mindful of the fact that not all stocks are safe and low risk. There are conservative investments. Then, there are those that are considered more aggressive and volatile. Conservative investments do not deliver high returns on investments but they also do not run the risk of seeing value decline tremendously. Aggressive stocks come with the potential to earn huge profits but they also run the risk of major declines in value. That is not good or bad. It is just the proverbial nature of the beast.

You will certainly not want to put all your money into one stock. This could prove disastrous if the stock tanks in value. Rather than take such a risk, it would be much better to diversify the portfolio and spread the risk (and investment capital) around different stocks of different value. The goal here would be to look at the overall average value of the portfolio as opposed to each individual stock. Of course, the proper management of the portfolio would entail getting rid of investments that are doing poorly and increasing the assets of one that is doing well. However, such actions would not be taken with the frequency of trading since the goal here is long term investment planning.

And if you properly plan for the long term with your stock investing, you will more than likely experience a positive outcome. Many others have done so. Why not you as well?

This post was written by

jason – who has written posts on Budget Clowns.
Father of three and married to a lovely women. Always looking for ways to save money, and invest it properly for my children's future.

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