What are Stocks?
Stocks are a way of investing in a company by buying an ownership stake in it. The more stocks (or shares), the greater your profit when the company appreciates in value.
What are the Different Types of Stocks?
It isn’t always enough just to wonder “what are stocks?” since the options are as wide and varied as the companies they represent.
You can buy stocks in tech companies like Apple or Amazon, large corporations like Walmart or Procter & Gamble, banks like JPMorgan Chase & Co or even in energy industry companies such as Chevron.
As long as companies adhere to certain financial rules, they can “create” certain kinds of stocks.
Common stocks are, as the name implies, the most common and can be bought by pretty much anyone wanting to do so (assuming they have enough capital to afford it). Common stock usually comes with certain voting rights on company decisions but – more importantly – with a share of the company’s profits (or losses).
You may also be able to purchase “preferred stocks” which typically have a higher income that is usually also fixed & guaranteed. Those shares also tend to suffer less volatility. The reason these are called “preferred” stocks is that, since the stockholder here does not have voting rights, he or she is not held accountable for a company failure. In case of liquidation, preferred stockholders are considered debt holders and are remunerated from a company’s assets before common stockholders.
How to Trade Stocks
Now that you know what stocks are, you are probably asking the next question, which is – of course – how to trade stocks.
In pure technical terms, it is a rather simple enterprise, at least in our day and age.
With the advancement of technology and the “opening” up of most global exchanges, anyone across the world can buy stocks in any company. All you would need is an internet connection and an account with an online broker and enough money, of course.
But that is not the question at hand, because if it were, you would not need a “how to buy shares for beginners” guide.
The trick to becoming a successful trader in any stock is learning to “read” the market, to be in-tune with all the comings and goings, successes and failures of the company and its market sector.
For example – If a report is about to come out that will show more people buying household items online, that would be great for Amazon’s stock, so owning it would be good for you.
But of course – there is also a downside.
What are the Risks of Investing in Shares
The downside should be obvious and is the reason that not everyone across the world is currently investing in shares.
Owning a stock does not guarantee profits; you are just as likely to invest your hard-earned savings in a stock that seems solid enough only to watch an entire industry stumble around it. So, you could have invested 50k in buying a stock which, after a collapse, is worth 5k on various exchanges.
Investing in share CFDs is an alternate solution, which enables you to trade on a stock’s losing value – shorting the stock. Here, however, the investment is usually leveraged, which means profiting or losing a much larger sum than your initial investment.
But losing your money may not be the only risk you run. You could also be powerless to stop a company from taking steps that might be detrimental to its own financial well-being, or watch as an entire sector collapses due to outside forces (take the airline sector, for example, during the COVID-19 crisis).
There is also a slight tendency among inexperienced traders to “place all their eggs in the same basket”, which is almost always a bad idea. But as you gain experience with the dealings within a single company, you may lose sight of other parts of your portfolio.