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Want to invest for the future but not sure where to start? Here's a beginners' guide to understanding stocks.
What Are Stocks?
"Behind every stock is a company. Find out what it's doing." - Peter Lynch, Manager of the Magellan Mutual Fund at Fidelity Investments from 1977-19901*
Stocks are ownership stakes in a corporation. When you buy stock, you're buying partial ownership in a company. Stocks are sold as shares, and every shareholder is entitled to a percentage of corporate assets and annual profits (known as a dividend). Once shares have been issued by a corporation, investors can buy and sell them to other investors on the stock market.
Your ownership percentage is calculated based on how many shares you own relative to the number of total shares issued by the company (known as outstanding shares). So if Acme Company issues 1,000 shares of stock and you purchase 100 of them, you would have claim to 10% of Acme's assets. However, if Beta Company issues 10,000 shares and you purchase 100, you would have claim to just 1% of Beta's assets.
|Shares Owned||Shares Outstanding||Ownership Stake|
This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.
How to Buy Stock
"If you are shopping for common stocks, choose them the way you would buy groceries, not the way you would buy perfume." - Benjamin Graham, Author of "Security Analysis" and "The Intelligent Investor"2**
There are several ways for you to build your stock portfolio. You can buy and/or sell shares through:
- A licensed stockbroker - A stockbroker is a registered professional who buys and sells stocks for customers in exchange for a small percentage of the cost of the trade (commission fee).
- A direct stock purchase plan (DSPP) - These plans let you purchase shares directly from a company without going through a broker. Plans are typically offered to company employees and stocks are sometimes priced at a discounted rate. You'll avoid commission fees when buying stock this way but lose the freedom to trade stocks at will as the company retains the right to buy and sell DSPP stocks.
A dividend reinvestment plan (DRIP) - Administered by corporations, these plans allow you to buy more shares of stock you already own by reinvesting your dividends in the company who issued the shares.
A stock fund - Also known as mutual funds, equity funds or exchange-traded funds (ETFs), stock funds are professionally managed investment accounts that let you pool your money with other investors to buy and sell stocks. Stock funds can be purchased directly from investment companies, employee 401(k) plans, or through a financial advisor.
But before investing in stocks, if appropriate, look at the options available with your employer's 401(k) plan and consider utilizing the benefits of a Roth IRA.
Strategies for Stock Investing
"If you are not willing to own a stock for 10 years, do not even think about owning it for 10 minutes." - Warren Buffett, Chairman & CEO of Berkshire Hathaway*1
A company's stock price is determined not only by the company's overall financial performance but also by public perception, causing stock values to fluctuate frequently based on things outside company control such as political or market events. There's no guarantee that the stock you own will increase in value, and it's possible you could lose some or all of your investment should the stock drop in value.
With stock prices changing every minute, there's potential for you to make a quick profit–or suffer an equally quick loss–by trading stocks frequently (also known as day trading). However, over long periods of time, stocks typically offer a higher rate of return, with investments earning average overall returns of 6-7% per year.3*** This is why many financial advisors encourage holding stocks for years or decades.
The golden rule for investing in stock is to buy when prices are low and sell when prices are high – although no one really knows for sure when stock prices will go up or down. If appropriate, invest in companies with potential for growth.
Talk to a Financial Advisor
Financial advisors with BECU Investment Services are here to help. They can assist you on your retirement journey, ensuring you are on the right track to achieving your financial goals. Set up a complimentary consultation or call 206-439-5720.
The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.
Stock and mutual fund investing involves risk including loss of principal.
An investment in Exchange Traded Funds (ETF), structured as a mutual fund or unit investment trust, involves the risk of losing money and should be considered as part of an overall program, not a complete investment program. An investment in ETFs involves additional risks such as not diversified, price volatility, competitive industry pressure, international political and economic developments, possible trading halts, and index tracking errors.
1*Johnston, Michael. "41 Inspiring And Intelligent Investing Quotes." 1 October, 2014. Dividend.com.
2**“Warren Buffett describes The Intelligent Investor as "the best book about investing ever written."
3***Siegel, Jeremy J. Stocks for the Long Run 5/e: the Definitive Guide to Financial Market Returns & Long-Term Investment Strategies. McGraw-Hill, 2014.
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