Everything I Need To Know About Stocks – You probably know that investing in the stock market is all the rage these days. You may have noticed that more and more of your social conversations revolve around the stock market or various investments. In fact, it is becoming rare to meet such a person these days
Interested in stocks. After all, the market has been on fire for the past year. You may find a lot of random internet users talking about how they got rich by buying Tesla stock or riding the current GameStop wave. That all sounds great, but maybe you don’t really know the ins and outs of the stock market. If you have FOMO but are afraid to put your own money into the market until you know more, we’re here to help. Let’s answer the most basic question many of you are asking: What are stocks?
Everything I Need To Know About Stocks
In essence, stocks represent the right to an ownership share in a company’s assets and profits. Keep in mind, however, that a share is only an infinitesimally small fraction of ownership. Most companies have millions of shares available, with most owners owning a majority of them. However, when a company is publicly traded, it literally means that people can buy a small percentage of it.
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These pieces of ownership are measured in shares. Each share can be bought and sold (or traded in other terms). Most stocks that you hear about in the news are traded on large exchanges such as the New York Stock Exchange (NYSE) or the National Association of Securities Dealers Automated Quotations (NASDAQ). In Canada, the Toronto Stock Exchange (TSX) exists. In the UK, there is also the London Stock Exchange. These exchanges basically act as intermediaries, matching buyers and sellers to enable efficient price discovery.
You cannot buy shares directly with various exchanges. For the general population, stocks are owned by a brokerage firm. They are companies that act as custodians for your assets. You were forced to trade stocks by phone, literally calling your broker with instructions. These days, however, companies have a website (or even a smartphone app) that does the work for you.
You may have heard of the popular stock trading app Robinhood. There are many others, including Fidelity, Interactive Brokers, TD Ameritrade or Vanguard. You can quickly and easily sign up for an account with these services, link it to a payment method (usually your checking account or credit card), and start buying a variety of stocks. The software will digitally communicate with the exchanges to execute your orders. These websites or apps also allow you to track the price of any stock you are interested in and will show your profit (or loss) in real time.
It all sounds complicated, but the electronic custodian approach works rather well in practice. In the old days, you talked to a broker who would buy and sell stocks. You can also request this stock to be mailed to you via stock certificates. Many people liked this method, because it gave them something physical to touch and see.
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On the other hand, you never really know how much each share will cost before the trade is made. That’s because by the time you hang up with your broker, prices will have changed and they’ll be trading for you. Additionally, all those middlemen will take a huge cut of every trade.
Nowadays, everything is done electronically. You no longer need to request stock certificates to be sent directly to you. (Is that even something that’s available these days? Probably not.) Overall, though, it’s a good thing. Physical stock certificates can be stolen or lost. You were ultimately responsible for the protection of those assets. Now everything is securely stored in an online account, which you can access from any laptop or smartphone. These custodians will keep your assets safe, plus they’ll handle transaction details, fees and tax records for you.
Best of all, trading these days is very instant and commission-free. When you see a price you like, you can immediately click “Buy”. You can rest easy knowing that you won’t end up spending more (or less) than you want because of big price fluctuations.
Saying you own a portion of the assets and profits of a large corporation is both fair and unpopular. However, that doesn’t mean you can walk into Disney headquarters and demand an office. Or a meeting with the CEO. Or even free admission to Disney World. So what exactly do you get from owning company shares? Here are some of the benefits you will enjoy.
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You will get dividend. Companies find that offering a financial reward (i.e., dividends) will attract more buyers to their stock. A dividend is basically a cash payment that a company issues to any shareholder who owns the stock on a predetermined date. The common wisdom is that by sending cash to shareholders periodically, they will not need to sell their shares. It reduces supply, which in turn increases demand, keeping stock prices high.
Dividends are generally considered a form of distribution of company profits. However, in practice, a corporation can issue dividends even if they have no profits at all. In modern days, companies routinely borrow at one end and pay dividends to their shareholders at the other. That’s because stockholders of dividend-paying companies expect them to pay dividends like clockwork. Any missed schedule is seen as the company being in financial trouble. There is usually a big fall in stock prices.
You also get the right to vote. Shareholders may vote on any issue at the annual meeting, usually by proxy. While most shareholders routinely throw away mailings urging them to vote, it is important that you as a shareholder try to understand the issues at hand. Even if you trust the company’s executives or board of directors to make sound decisions, there’s no harm in educating yourself.
It is within your rights to manage the company as best you see fit. Your vote may only be one out of thousands (or millions), but you owe it to yourself to cast it anyway. You will also learn more about the company you choose to invest in, based on the research you can do with the information in the voting package. Either way, it’s worth your time.
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As a shareholder, you are entitled to a claim on the assets if the company goes into liquidation. Hopefully you will never experience owning stock in a company that declares bankruptcy. It’s not a particularly fun experience and usually loses investors a ton of money.
However, always remember that if you are a shareholder of a company that goes under, you are in line to receive wealth. Unfortunately, you’re not going to be the first in line. Lenders and bondholders will get their cut first. In many cases, common shareholders receive nothing. Regardless, it’s worth keeping an eye on one of your stock picks if it goes belly up.
Stocks are traded on exchanges. As we mentioned earlier, an exchange is just a platform that connects all buyers and sellers. Since stocks are bound by the forces of supply and demand, prices will rise when there are more buyers than sellers. The reverse is also true, as prices will fall when sellers crowd out buyers.
When you go to the quote screen on the stock trading app, it will show the price. That number is simply the price at which the last trade was made. This is the amount that the buyer and seller finally agreed to exchange shares for money. Note that with every trade, there is always a seller and a buyer. That’s why you’ve heard the phrase “there’s always a buyer somewhere.” After all, if a buyer isn’t willing to take the stock off the seller’s hands — even in the worst crash — the price of Particle stock won’t go up.
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Now that you know what you get when you own a stock, there is something else you must learn before you enter your first order. You need to know (and understand) the difference between a “market order” and a “limit order”.
You see, the default option to buy and sell stocks is the market order. This means you are asking the exchange to buy the stock based on the current market price. This is similar to going into a store and buying something off the shelf, at whatever price the item is listed. Alternatively, you can set a limit order. This means that you set the price at which you want to execute the buy order. Shares will only be bought (or sold) if the market price hits a certain threshold. Let’s look at a quick example.
Suppose you want to buy five shares of Disney (DIS) stock. As you look at the purchase screen, the price increases rapidly
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