How to Choose The Type of Stock You Like
If you are ready to start investing in stocks, you first need to learn how to choose the right ones. Buying stock is different from having a savings account- the money is not insured, and you always have a chance at losing part of your investment.
There are two ways to make money by investing in stock. If the price of that stock goes up, you will make money. Dividends are a portion of the company's profits that is paid to shareholders, as opposed to being used to pay bills or buy new equipment.
When you buy stock in a company, you are acquiring a share of ownership- so it's important that you know what that entails. As a shareholder, you have limited liability; if the company goes under, you are not personally liable for its debt. However, the company's creditors would be paid before you get any money. If their debts are not cleared, no legal action can be taken against you.
When learning how to choose stocks that you like, you should familiarize yourself with the two different stock types. Most stocks are of the common variety- holders of common stocks have voting rights at shareholder meetings, and get dividends. There are also preferred stocks, which come with a lower price and higher/more regular dividends. Common stocks are more suited to long term growth, while preferred stocks are better for realizing immediate income.
When choosing stocks, you should always check their P/E ratio; it tells you how much the company earned on every share. A higher P/E ratio can indicate an overvalued stock, or a bright future, while a low P/E ratio can indicate problems within the company. Most newspapers and online quotes have this very important number.
You should also study the history of a company before you invest. Find out if their growth has been consistent from one year to the next, and also if they pay dividends regularly. You should also learn whether the management team is stable; frequent managerial changes can indicate problems from within.
Take a look at the company's recent performance before you buy stock. Are its profits/revenues rising or falling? If the company is solid, a decline in stock price may be a good thing. You should also ask yourself why you want to buy a particular stock. If the answer to that question is emotional rather than rational in nature, you should invest elsewhere.
When you are ready to buy stock, you should open a brokerage account, which can be done either through your bank or via a brokerage house. Brokers charge higher fees, but offer a higher level of service. However, if you know how to research companies before investing, you can get by with using a discount broker. These charge low fees, and offer reduced service.
For those who don't want to go that route, stock can be bought through a mutual fund. Mutual funds' stocks are chosen by fund managers, and the fund charges a portion of the profit. These funds provide all the benefit of the fund manager's expertise, without the legwork of researching individual stocks.