The universe is unforgiving to the less privileged. That is an undisputed fact. It’s said that the rich also cry; the entire situation will be worse in the absence of financial stability. This clear reality pushes us—humans—to find ways to make money. Although making money is the goal, doing it with zero to little manual labor is the dream of many individuals. Investing in stocks represents a sure way to make that dream a reality. Don’t know what stocks are, let alone how to invest in them? This article is for you. Read on to find out what stocks are, how they work, benefits, types, and how to invest in them.
What Is A Stock?
A stock is a security that provides stockholders with part ownership of a company. Stock is also known as equities. Oftentimes, beginners like yourself mistake stocks for shares, and that’s understandable. The best way to understand the concept of stocks is to picture a pie. Think of the pie as the company’s stock put on sale to the general public. If the pie is the company’s stock, then each slice is a ‘share’. Simply put, the company sells its stock while you buy shares of it.
How Do Stocks Work?
Companies sell (issue) stocks as a means to raise funds for projects such as research, expansions, etc.
When a company finally decides to issue its stocks, it goes through a process known as an IPO. The initial public offering process, as the name implies, is when the company makes an offering of its ownership to the public. This is the business’ equivalent of “going public.”
Once the stocks are issued, investors and brokerages are then allowed to buy shares. Owning shares of a company grants you ownership of its assets and earnings proportional to the percentage of shares you own. Let’s simplify it:
If company A issues 1000 shares of its stock to the public, and you buy 2 units of shares. You only own 0.2% of the company.
As a matter of fact, the more shares the company issues, the lesser your percentage becomes. For instance, after purchasing 2 of the 1000 shares, the board of directors approves the issuance of 1000 more shares. The shares total 2000, and you now own 0.1% of company A’s assets and earnings.
The Concept of Shareholder Ownership
A stockholder or shareholder is an individual or entity that owns at least one share of a company’s stock.
As a shareholder, you DO NOT own the company. What you own is the company’s shares. Using the previous example, the initial 0.2% is the percentage of the company’s stock you own.
Why? It’s because the law treats corporations as legal persons. They can borrow money, buy properties, and pay tax just like you and I. But those assets and liabilities do not belong to the investors. This concept is a bonus, as shareholders are not held accountable for the corporation’s failures.
What happens if the company goes bankrupt? In such events, the judge might force the corporation to sell its properties. Regardless, your assets as a shareholder are immune to such orders. With that, drastic depreciation of the share value will be the problem you will face as a shareholder.
Since you understand that owning shares does not necessarily mean you own the company itself, here are some perks of shareholding.
Benefits of Stocks
The benefits of stocks cut across all standpoints: long-term, short-term, shareholders, and corporations. Here are some of the benefits that serve as motivation.
Dividends: These are cash rewards given to shareholders at the end of the financial year. It’s a part of the company’s profits and allotted based on ownership percentage.
Capital Gains: This is one of the long-term goals. It’s the increase in the value of a company’s stock. If you bought one share at NGN 10,000 two years ago, chances are that it’ll cost significantly more now. So, you can buy now and sell at a profit later.
Liquidity: Stocks are easily bought and sold through exchange mediums. You can also decide to sell units of shares in parts instead of whole.
Types of Stock
There are two main types of stock a company can issue: common and preferred.
Common Stock
Corporations can choose to issue common stocks, which grants shareholders the rights to vote on important corporate decisions like the selection of new board members, stock splits, company objectives, etc.
Common stock also rewards its holders a part of profits through dividends. Also, in the event of liquidation, common shareholders have some rights to the company’s assets. Although, common shareholders may not receive compensation in the event of liquidation.
Preferred Stock
This offers its holders less rights than the common type. One, preferred shareholders have zero or little voting rights. Regardless, it’s the best choice for investors looking for stability in future returns.
It offers rewards in the form of dividends significantly higher than the common stock that can be paid monthly or quarterly. Also, in the event of liquidation, preferred stockholders have a higher claim to assets after bondholders.
How To Invest In Stocks
According to Vanguard, between 1926 and 2022, a portfolio of 100% stocks returned an average of 10.2% annually, while a 100% bond portfolio averaged 5.1% in returns in the same timeframe. This fact further proves owning stocks is a good way to invest money.
Here’s a step-by-step guide to help you out.
Step 1: Open A Brokerage Account
A brokerage account is one that allows you to buy and sell a variety of investments. Some brokerages have investment apps to make it easier to buy and track your investments from your phone. Examples of brokerage firms you can check out are Fidelity Investments, Vanguard, and Charles Schwab.
Step 2: Choose Which Stock To Buy
Just like pizza, there are various company stocks out there. Weigh the options carefully with enough foresight before committing.
Step 3: Know How Many Shares You Want
Since you already know which stock you are investing in, you should come up with a strategy. Consider the price of each share, why you want to buy, and why you’d sell. These reasons will help you conclude just how much shares and how you want to buy them.
Step 4: Choose The Order Type
There are varying order types available, each with its peculiarity.
You can use a market order, which tells the brokerage to buy at the best price available.
Limit orders: you can instruct your stock broker to only buy a stock at the price you feel its worth. For example, if a stock sells at NGN1000, you can instruct your broker to start buying only when the price hits NGN800.
Step 5: Place Your Order!
Stocks and Bonds
Stocks and bonds are two terms so different that they shouldn’t be mixed up stocks, you literally buy ownership of some kind of company; bonds simply mean that you lent the company some of your money.
As a bondholder, you don’t own any part of the company; it basically just repays the money with profit instalmentally. In addition, bondholders are prioritized over stockholders during liquidation.
Conclusion
Do you want to achieve financial independence? Then this article must have helped you in more ways than one. Remember, while the benefits of investing in stocks are eye-catching, it also comes with risks. Take your time, study the terrain, and get ready for the rewards.
