Investing in the stock market may seem like a confusing process, but it doesn’t have to be. All it takes is a little patience, a sufficient amount of funds and an understanding of some basic stock investing principles and practices.
What Is Stock?
When you purchase stock, you are purchasing an ownership stake in a company's assets with the hopes that it will eventually appreciate in value and earn you money. Companies issue stock in order to raise money for any number of reasons, including to pay off debt or expand into a new market.
The two main types of stock available to investors are preferred and common stock. While preferred stockholders do not have the voting rights enjoyed by common stockholders, they are the first class of stockholders to receive a portion of its earnings, referred to as dividend payments. Preferred stockholders also receive payment priority over common stockholders in bankruptcy proceedings.
Invest with a Broker
For many, one of the first steps to purchasing stock involves opening a brokerage account. If you have little to no investment knowledge, a full service brokerage firm may be right for you. While these type of firms charge higher fees and commission rates, they offer extensive investment advice and management, and face-to-face engagement.
As the name implies, discount brokers charge lower fees than full-service firms. That is because you will be primarily responsible for managing your own investments through an online account. If you’ve done your homework and would like to maintain total control over your money decisions, then choosing to invest with a discount broker is your best option.
Make A Direct Investment
Stock brokers act as intermediaries between investors and the market. If you want to eliminate the middleman, you can purchase stock options directly from a company. This method is often referred to as direct investing. Direct investment plans will differ depending on the company -- some only offer direct stock plans to employees or existing shareholders. Another type of direct invest strategy, called a dividend reinvestment plan, allows a company’s current stockholders to buy more shares by reinvesting dividend payments back into the company.
Whether you use the services of a broker or invest directly, it is important to understand that all forms of stock investing comes with risk. Internal scandals, insolvency and general market volatility can all negatively impact a stock’s value. In the end, information is key. Arming yourself with important knowledge about the company and industries you’re investing in can at least keep you informed of any potential risks to your stock holdings.
Carolyn Okomo is a business writer who gained her reporting chops as a daily bankruptcy reporter at "The Deal," a New York-based trade publication. She is currently based in Kansas City, Mo.