With the growing popularity of many investment instruments, increasingly more people from all over the world want to put money into something valuable. Today, investing in stocks is successfully competing with bank deposits, real estate investments, and other assets, even among ordinary people. There are certain risks involved, such as stock market bubbles – the first ever was recorded in 1720, and is known as the South Sea Bubble. Let’s figure out how to earn additional income on stocks!
What are stocks?
A stock is a security that confirms your right to own a part of a business. It records the fact that you own a share of the company and that you have the rights of a shareholder. There are several ways to make money on stocks: buy stocks and wait for their growth, or get profit from lowering the stock price. In developed countries, investing is very popular: according to statistics, 8 out of 10 people put some of their money in the stock market.
Share ownership endows you with the right to a part of the profit in the form of dividends: the more money the company earns, the more the shareholder will receive. And vice versa — in case of bankruptcy, the owner of the share will lose the entire amount invested. Simply put, a share is a document that confirms that a shareholder owns a part of the company.
Types of shares
Before you start investing, you need to choose the type of shares that you want to buy. They come in two varieties and differ in the rights of shareholders:
- Ordinary. Ordinary shares will give you the right to vote at a company shareholders’ meeting. The scheme is simple: one security — one vote. This type of stock is most common. If you own ordinary shares, you’ll be able to receive dividends. They usually come in a smaller amount than with the second type, but they are more profitable in the long term.
- Preference shares. The amount of dividends from such shares is determined in advance, and their owners don’t have the opportunity to participate in voting, except for a small number of situations: for example, reorganization or liquidation of the company. Also, the owners of preferred shares have an advantage in case of a company’s bankruptcy: they will receive payments from the assets of the enterprise before anyone else.
The choice in favor of preferred shares should be made if your main goal is to generate income. And ordinary securities are suitable if you want to play an important role in the company and influence its operations.
Are there any risks for the shares’ owners?
Although stocks are an attractive and relatively profitable investment tool, they still carry some risks for owners:
- the stock price may fall — if you need to sell your shares, you’ll suffer losses;
- the company you own may go bankrupt — after liquidation, you’ll receive only those funds that remain after the distribution of money for employee salaries and the repayment of debts, i.e., to contractors or suppliers;
- if you buy shares of foreign companies, you are automatically exposed to currency risk — you may incur losses during conversion;
- company management may suspend dividend payout — if you counted on them, you won’t be in the best situation.
In order to always stay in the black, you need to know how to check the stock market.
Stock market check
A responsible investor always conducts a full-fledged study of stocks and the market before buying!
When assessing the investment attractiveness of an issuer, it’s best to rely on an integrated approach that comprises the following methods:
- Macroanalysis. The cyclicity of the company relative to the business cycle.
- Fundamental analysis. The main business indicators, efficiency, and financial health.
- In-depth internal analysis of the company and its reporting.
Initially, it’s enough to determine the nature of a company’s activities, that is, which economic industry and sector it belongs to. This allows one to get an idea of the cyclical nature of the business, its technological effectiveness, sensitivity to inflation, and changes in interest rates. This allows you to assess the strategic prospects and financial solvency.
A person who starts investing finds themselves at a crossroads since they need to choose the right stocks from a variety of options. There’s a huge number of securities and each one seems to be “screaming” to be chosen.
We hope that this article has helped you understand how to choose shares to buy. Remember that for a competent choice it’s important to rely on the results of the investigation you conduct, your further goals in the market!