The stock market can be an profitable place to invest, but it is important to be aware of the risks as well as the potential benefits. When you buy an individual stock, you have the opportunity to make money, but you also risk losing your entire investment. Understanding both the potential upside and downside of stocks makes you a more informed investor.
Share Price Appreciation
When you buy a stock, you hope that stock price will go up. If you are correct and the stock does go higher, you can make money by selling your shares on the open market. You need to compute your capital gains when you sell, because you will owe taxes on your profit in the stock.
Bankruptcy of the company in which you hold stock is a potential risk, because common shareholders are at the back of the line when the company's assets are distributed. That means you could end up recouping pennies on the dollar, or nothing at all, if the company you choose to invest in declares bankruptcy.
Sometimes a company offers to buy back its shares at a set price. If that price is more than you paid for the stock, you can make money by selling your shares directly to the company. It is important to read the stock buyback offer carefully to determine whether it makes sense to sell your shares. There is a chance that the shares' price will go higher than the offer price, and you could make more money by selling them on the open market.
Some stocks pay dividends based on the number of shares you own. That gives shareholders the ability to make money on a stock without having to sell it. The dividend amount and dividend yield vary from company to company. If you need current cash flow, you may want to seek stocks with a high dividend yield. You also can use dividend mutual funds to generate current revenue.
Share Price Depreciation
When you buy a particular stock, the price of those shares can go up or down, and you need to be prepared for that volatility. The closing price is listed each day in the financial press and on a number of financial websites. You also can track the price of the stock during the day and get statistics showing the 52-week high and low for the stock. When investing in a stock, it helps to understand that the stock market generally is a long-term investment. While the stock price can fluctuate wildly in the short term, if you have a long-term time horizon, those short-term moves might not be as significant.
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