I would highly love to sit back, watch my money grow, and collect dividend checks as money rolls in.
Really !? I get it, it sounds like I am building a castles in the air. The claim however, is more substantial than you might think. And the money rolling thing? That too is true( this of course would continue as long as the market allows-which most often it does unquestionably). As most have already guessed (on mentioning of dividends), am talking about STOCKS.
Stock is undoubtedly one of the greatest tools and financial instrument ever built for creating wealth. Very and very, lucrative and risky, respectively. Allow history to speak for itself first.
The likes of many 1990's American investors, many went for the rage of investing in stocks, Yet they really didn’t know exactly what they were investing in. If they had a rudimentary understanding of what stock really is, perhaps they could have avoided some expensive mistakes. They watched as their stock portfolios and their stock mutual funds skyrocket ( technically; the bull market) and by 1999 about half of the country's household were in the stock market. Raar!! like a bolt from blue, millions lost money when the stock market( actually the dot-com market) fell big time (technically; the bear market) in 2000-2002. Knowledge is therefore, prudent even for the self-proclaimed know-alls, before venturing into this lucrative but risky market.
Unfortunately, even after a decade of wound healing and fresh regrowth,many investors do things in reverse; they buy stock first and learn “some lessons” afterward. Your success is dependent on doing your homework before you invest your first shilling in stocks. Most investors don’t realize that they should be scrutinizing their own situations and financial goals at least as much as they scrutinize stocks. But how else can you know which stocks are right for you?Too many people risk too much simply because they don’t take stock of their current needs, goals, and risk tolerance before they invest.
The bottom line is that the first thing you do in stock investing is not to send your money to a brokerage account or go to a Web site to click “buy stock.” The first thing you should do is find out as much as you can about what stocks are and how to use them to achieve your wealth-building goals. The winning techniques are tried and true but how you assemble and apply them is what makes the difference.
That's exactly why a series of stock market learning has been created for you. It is however for the open minded. In the first part,you will learn just what stock is. Stay anxious but learn and apply. Wish you luck throughout the series.
What really is stock?
Whether you call it shares, equity, or stock, plain and simple, it means a share in the ownership of the company. That is, you get to own a part of a company. Acquiring more stock means you get more stake in the ownership of the company.
You own”, I know. It overwhelms. Holding a company's stock means that you are one of the many owners (shareholders) of a company and, as such, you have a claim (though usually very small) to everything the company owns. That might technically mean you own, a portion of the company's compound( the grass included), a tiny sliver of every piece of furniture, every trademark, and every contract of the company. As an owner, you are entitled to your share of the company's earnings as well as any voting rights attached to the stock.
My grandfather would have to prove his ownership of stock using a stock certificate during their time. But not anymore, your brokerage keeps these records electronically, which is also known as holding shares "in layman's of course”. This is done to make the shares easier to trade. Now, trading with just a click of the mouse or a phone call. Compare it with the past, when a person wanted to sell his or her shares, that person physically took the certificates down to the brokerage.
Albeit an owner, discern the following:
- it does not mean you have a say in the day-to-day running of the business. Instead, one vote per share to elect the board of directors at annual meetings is the extent to which you have a say in the company. You just can't walk into the Toyota Company, and pick your right choice of Toyota-Harrier and drive away, just because you hold a share or ten of the same. It would be weird, don't you think?
- It has a limited liability, which means that, as an owner of a stock, you are not personally liable if the company is not able to pay its debts. Other companies such as partnerships are set up so that if the partnership goes bankrupt the creditors can come after the partners (shareholders) personally and sell off their personal assets like house, car, furniture, etc. Owning stock means that, no matter what, the maximum value you can lose is the value of your investment. Even if a company of which you are a shareholder goes bankrupt, you can never lose your personal assets. But you can lose all of your savings.
- When it comes to big decision making, you don't quite have much material influence, rather the large investors do. Actually, you went there to earn on profits, let the managers do their work. But if work is done poorly, together shareholders can vote them out.
- The importance of being a shareholder is that you are entitled to a portion of the company’s profits and have a claim on assets. Profits are sometimes paid out in the form of dividends. The more shares you own, the larger the portion of the profits you get. Your claim on assets, however, is only relevant if a company goes bankrupt. In case of liquidation, you'll receive what's left after all the creditors have been paid.
Hmm... I am satisfied with the introduction, are you? Check out for the next article on the same subject. We will be discussing the following; debt and equity-what differentiates a bond from a stock, the types of stocks. You will also get to know how stocks trade.