Pewaukee Economics & Finance : Should You Invest in Stocks

Isabelle Fowler

What is a stock actually? A stock is a share within a company that represents a piece of ownership equity in the company,

meaning shareholders get voting rights on company actions and claims on corporate profits. Stocks are exchanged within a

stock market, where individuals and companies come together to buy and sell shares. Shares are priced by supply and demand

in the market. Market flow and exchanges are monitored by specialists in order to maintain an orderly and fair market. These exchanges

have specific terms, bid and ask. A bid is the price buyers are willing to pay for a stock and an ask is the price that sellers

are willing to accept for a stock. There are two basic types of shares, common and preferred. While the two are almost identical,

the difference is that common shares generally have voting rights within a company - things such as voting in a board of

directors - while preferred shares do not. That being said, preferred shareholders have preference over assets and dividends in the event of a

liquidation.

Why do businesses sell shares? Businesses grow at a rapid pace, going from being an idea in an entrepreneur’s head to a

functioning business, and in order to keep up with this, businesses need lots of capital. A business can raise capital through selling

shares or borrowing money. Borrowing money isn’t always the best route because startup businesses have fewer assets to pledge for a loan.

Loans also create interest which can end up being a bigger financial burden.

How do I buy stocks? The best place to start is through an online stockbroker. Once you open and fund your account, you can

find and buy stocks through the website immediately. Alternatively, you could buy stocks from the company directly, or

use a full-service stockbroker. Opening an account on a stockbroker website is similar to opening a bank account, you provide

your information, proof of identification, and fund your account through electronic transfer or mail-in. Before you bid for a share,

do some research into the company, make sure it’s something you truly want to invest in. Having this background information will make

you feel more confident about your purchase. When first entering the world of stocks, it’s best to start small - with just one share.

This makes it easier to manage and monitor your money.

Of course, the stock market has its pros and cons. You could earn benefits including dividends or an average annualized return of 10%;

however the stock market is unpredictable so returns are never guaranteed. The company can decide to return money to its shareholders

via dividends - this is cash paid to you on a regular basis just for being a shareholder. As a business grows, the value of their stocks

increase, and when you’re ready to sell, you’ll pocket the difference.

In order to become a successful investor, you should invest in a business that you will hold onto for 5+ years. This means the company

should be one you believe in. When you appreciate what the company is doing, you’re more willing to stick with them.

Research:

Pewaukee Economics & Finance