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An Introduction to Stocks and How To Make Smart Investing Decisions

An Introduction to Stocks and How To Make Smart Investing Decisions

January 02, 2023

If you're like a lot of people, the idea of investing in stocks can seem daunting. After all, the stock market is rife with stories of people who have lost big and even bigger gains made by those lucky enough to get in on the ground floor. But there's no need to be intimidated. With a little bit of knowledge about how stocks work, you can make smart decisions about your investments and start building wealth for your future.

What Is a Stock?

Simply put, stocks are shares of ownership in a company. When you purchase stock, you are buying a part of that company—which means that when the company makes money, so do you! Conversely, if the company loses money, so will your investment. It's important to understand this dynamic before making any investing decisions. 

How Do Stocks Work? 

The stock market is where buyers and sellers trade stocks—usually through brokers or online trading platforms—and it's driven by supply and demand. When more people want to buy a stock than sell it (a situation known as "buying pressure"), the price goes up; when more people want to sell than buy (known as "selling pressure"), the price goes down. As an investor, understanding how these forces interact can help you make smart decisions about which stocks to buy or sell at any given time. Additionally, it's important to track news reports and financial data related to companies whose stocks you own in order to stay informed about their performance over time. 

What Are Stocks Used For?

Stocks can be used for anything from long-term investments (such as retirement savings) to short-term speculation (such as day trading). Depending on your goals and risk tolerance levels, different types of investments may be right for you; it's always best to do research and speak with an accredited financial advisor prior to committing your funds. However, one thing is certain: stocks have created some of the greatest wealth in this country and have been integral in creating economic growth over time.

Are There Different Types Of Stocks?

Common Stock – Common stock is the most common type of stock and is usually what people mean when they refer to “stocks” in general. This type of stock gives shareholders voting rights on certain issues, as well as proportional ownership in the company—the more common stock you own, the greater percentage of ownership you have in the company. It also entitles shareholders to dividends if the board approves them (which don’t always happen).

Preferred Stock – Preferred stock differs from common stock in that it does not give shareholders voting rights on certain issues, however they are entitled to receive dividends before common shareholders if approved by the board. Additionally, preferred shareholders are typically paid out first if a company goes bankrupt or liquidates.

Blue Chip Stocks – Blue chip stocks are stocks issued by large, established companies with strong financial track records. These companies tend to be leaders in their respective industries and have proven themselves over time with consistent growth in profits and revenues. Investing in blue chip stocks carries less risk than investing in smaller companies since these larger companies are more likely to survive tough economic times without suffering major losses.

Penny Stocks – Penny stocks which are low-priced investments that trade for less than $5 per share. While these may sound like a good deal at first glance, penny stocks come with a wide range of risks that far outweigh any potential rewards. Think about it this way: penny stocks are comparable to investing in a startup business and about 90% of startups fail within the first year.

Exchange Traded Funds (ETF) – ETFs are baskets of securities that track an index like S&P 500 or Dow Jones Industrial Average, and allow investors to diversify their investments across many stocks with just one purchase; they are traded like ordinary shares on an exchange. They also offer lower expenses than mutual funds since there is no need for a manager and therefore do not require any management fees since ETFs trade passively and don't require any active management decisions.

Mutual Funds – Mutual fund are a type of investment in which a group of investors pool their money together to purchase stocks, bonds and other securities. These investments are managed by professional money managers who use the fund’s assets to achieve a predetermined investment goal. Mutual funds are one of the most popular types of investments for individuals because they offer exposure to different types of investments (stocks, bonds, etc.) without requiring the investor to actually buy and manage each individual security

What Does This Mean To You?

In conclusion, while stocks may seem intimidating at first glance, they don't need to be! With just a bit of knowledge about how they work and what they are used for, anyone can make smart investing decisions that will help them reach their financial goals now and into the future. So don’t be scared off by all the noise - take some time today to learn more about how stocks work so that you can start building wealth tomorrow!