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Thursday, February 2, 2023

Stocks – All You Need to Know Before You Invest in Stocks

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Stocks are proprietary corporate securities that do not have a certain maturity, and may issue only joint stock companies.

What types of stocks exist?

There are two types of stock: common or ordinary, and preferred or preference stock.

Preferred unlike regular do not provide votes, but offer other benefits to investors, such as:

  • Right to a dividend and it’s usually predetermined monetary amount or a percentage of the nominal amount of the stocks.
  • Preferred stock holders have the right to receive dividend before the payment of dividend to ordinary stockholders, after payment of interest.
  • Preferred stock holders have advantage in the distribution upon liquidation of the company in relation to ordinary stockholders.

In the following text the term stocks implies to ordinary stocks.

Why joint stock companies issue ordinary stocks?

Simple to raise funds for long-term financing with no credit borrowing.

What are the core benefits acquired by the purchase of stocks?

  • Right to share in profits paid in the form of dividends.
  • Entitled to a proportionate share of the assets of the company in the event of its liquidation.
  • The right to control that is implemented by vote at the AGM.
  • Emptive rights in the event of a new emission of shares.
  • Limited liability in the event of liquidation.
  • Limited access to business records of the company.

Since the nominal value of the stocks does not play any role in their daily trading, how to determine the purchase or sale of the stock price?

Price is determined by the price that a buyer is willing to pay at a given time, or at what price it is a seller willing to sell. If these two rates coincide, then will be realized buying or selling.

The price will rise, if demand for a particular type of stocks increases. If, however, the demand decreases, the price will fall.

Thus, the price is shaped through the market mechanism of supply and demand.

What are the main factors that affect on the stock price?

The market value of stocks is affected by many factors, the main ones are:

  • Expected revenue that the company will achieve in the future – if it is expected that company earnings in the future will be greater than the return on invested assets, the price will raise.
  • Financial strength of the company.
  • Business activity.
  • Overall macroeconomic environment in the country.

How to assess which stocks are suitable for investment?

stocks investment

Any investment contains an element of risk, and investing in stocks is not an exception. The degree of risk when investing in stocks depends on their type and quality, but also on the general situation in the market. The higher the potential of the return on investment is, the higher is the risk that we take.

An investor must first determine its investment goals and define whether it will be a long-term goal or a short-term financial gain, and to determine the level of its risk appetite: is ready to bear the risk or is the person with risk aversion.

Accordance with the objectives and the level of propensity to risk, and in consultation with a specialist (broker, investment adviser), the investor will decide which type of stock suits him best.

For example, for investors with higher risk aversion (conservative investors), most suitable are shares of companies that are strong and well respected leader in their branch of industry, which had maintained stable earnings in the past, and regularly pay out dividends.

Growth stocks are issued by companies that earn above-average profits compared to other companies in the economy. They are usually identified by a line of quality products in the development, and effective research and development sector.

Such companies retain a large part of their profits to invest in research and development. Investors who invest in such shares do not count on significant dividends, but hope to increase stocks prices.

 

How to get information on the movement of stock prices in the market?

Information on market movements in stock prices can be obtained by:

  • Over the internet, on stock pages.
  • In newspapers.
  • From brokers.

How to buy stocks?

To buy and sell stock, investor should consult his broker.

In addition to being authorized to perform sale transactions on the stock exchange on behalf of third parties, the broker can provide information and advice about investing in stocks.

Note: Although the final decision on investment is taken, an investment risk is always to the one who invests its money. Broker tips can help in achieving investment goals but never took the risk.

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