Starting a business requires careful consideration, as does the process of purchasing shares of stock. In no uncertain terms, purchasing stock entails becoming part owner of a company. For those unfamiliar with the process of buying stocks, wading into the world of investment can prove daunting. You can quickly narrow the focus of your stock purchasing by knowing what to pay attention to. Important factors in stock purchasing include types of stock, types of gains and investment time frame.
Types of Stock
Various types of stocks exist, some divided by market, others divided by price and yet more divided by return type. You can invest in large/expensive stocks, small/inexpensive stocks, technology stocks, agriculture stocks, growth stocks or value stocks, among others. Understanding the value and availability of stocks in different markets proves incredibly important. The diversification of stocks, or the purchasing of shares from many markets or industries, helps protect investors against loss. Spreading investments through a number of fields means that if one fails miserably, you don’t lose all of your investment capital.
Types of Gains
Stocks pay in two ways, through dividends and through capital gains. Dividends constitute portions of company profits paid to all the owners of a company, usually on a quarterly or annual basis. Capital gains constitute money earned through the actual value of a stock. For instance, if you purchase shares of a stock at $20 and sell them at $30, your capital gain equals $10 per share. When purchasing stock, pay attention to rising or falling value of a company’s stock as well as the dividends involved. If company stocks experience slow but steady growth and the business pays generous dividends, you may stand to gain more from combined dividends and capital gains than from investing in a company with rapid growth but marginal dividend payments. When tracking gains, pay attention to factors such as the Price-Earning, or P/E ratio of a stock, which tells investors the value of returns compared to the price a stock share.
Short-Term vs. Long-Term Investments
Stocks gain and lose value in the short-term and long-term. Some investors purchase stocks rising significantly in price over a period of a few months and attempt to sell them before the shares reach their peak price and begin declining. This practice constitutes momentum or trend buying. On a long enough time line, spikes and dips become irrelevant and the actual long-term value of a stock is revealed. For instance, assume stock in Company A sells at $10 a share in January. Between January and March it rises from $10 a share to $25 a share. By August, that stock sells for $7 a share. Between August and December the stock changes in value form $7 to $12 to $9, before settling at $15. If you bought the stock in January, your investment increases by $5 per share by December, regardless of the fluctuations occurring in the meantime. Most experts, including MSN financial writer Harry Domash, recommend never buying stocks based on market prediction, or short-term trends.
Factors Affecting Stock Price
Ultimately, the value of stock lies in its price. If the price of a stock goes up after you buy it, you earn money, and if a stock goes down, you lose money. When buying stock, pay careful attention to the factors affecting stock price, both in present, real time and historically. Three primary factors affect stock price, economic factors, market factors and company-specific factors. Certain types of stocks do well in certain types of economies, while others don’t. The profitability of a company and market demand for its products directly impacts the value of stock shares, as does the company’s value and profitability in relation to its competitors. Never purchase stock in a company with projected losses or historically decreasing value, and always sell stock shares purchased in such a company immediately; avoid risking increased losses.
- CNN Money; Top Things to Know When Investing in Stocks; Jean Chatzky; 2001
- Financial Industry Regulatory Authority: Smart Investing
- MSN Money Central; 10 Investing Tips to Balance Fear and Greed; Harry Domash; 2007
- “501 Stock Market Tips and Guidelines”; Arshad Khan; 2002
- “Investing for Dummies”; Tony Levene; 2010
- “Financial Markets and Institutions”; Jeff Madura; 2010