Image via WikipediaWhenever we hear the word investment, what comes to our mind is: "money saved and put in a vehicle that makes it grow." Anyone who invests money wants the risk to be low and wishes that the money grew faster. Because there are numerous investment options like stocks, debentures, bonds, and mutual funds, investors get confused and many of us end up making a bad decisions.
Before we take the plunge and invest in stocks, we should learn at lest the fundamentals of stocks (also called shares).
What are stocks?
Stocks are certificates of ownership in a corporation. If you buy one share of Microsoft, you become part owner of Microsoft--a very small ownership. But if you own thousands of shares you could be a large owner of that corporation.
Why do people buy stock?
The main reason to buy stocks is the return on investment that they may yield. By investing in stocks we have a better chance to make our money grow. Market experts share this opinion. If you compare the returns that one gets from other different investments, stocks would still be the top option.
Investors who buy stocks expect to get returns (on investment) from two sources: (1) from dividends (2) from capital gains.
What are dividends?
Dividends are what stock owners get as a share of the profits. Dividend checks are usually small. And the corporation isn't obligated to pay. The board of directors has to approve the payment of the dividend and the directors will approve the dividend if –if and only if-- the company made profits and there is enough cash flow. Dividends are considered regular income and are taxable.
What are capital gains?
Capital gains occur when the price of the stock goes up in value. If you bought one share at $20, and six months later the market value is $28, then you have a capital gain of $8. You'll have a 'realized capital gain' if you sell the stock--that means that you are taking your profits out. If you don't sell the stock and hold on to it, you have 'unrealized' or 'paper capital gains.'
Most investors buy stocks because of the opportunities for making capital gains. Dividends are of secondary importance because the amount is so small compared to potential capital gains.
Capital gains are also taxed, but at a lower rate than regular income.
Stocks are considered liquid investments and since you can easily sell them and cash out.
What is Diversification?
Every wise investor should have portfolio that is diversified. Buy shares of stock not just from one company, but from as many companies as your capital allows. When you hear the expression: "Do not put all your eggs in one basket," what that means is diversify! Diversify!
What is the minimum investment?
You do not have to start up with a huge sum to buy the stocks. You can easily open an account with an ‘online’ broker with as little as $2,000.
In a follow-up article I will explain how I manage my own portfolio.
How to Diversify
P/E Ratio, Crystal Ball
If you are interested in seeing how I achieved personal success in the United States, you may find my book of short stories East of Tiffany's interesting. Some of the stories are based on my life as an executive, investment banker, and financial adviser to wealthy investors in the East Side of Manhattan.
Close to half-million people have read East of Tiffany's so far. Order your copy from either Amazon.com or Barnes and Noble.
Since English is my second language, Mary Duffy --a master of the English language-- aided me not only with the editing, but she also contributed her own stories. I love her writing in "When You Wish Upon a Star." This is a story based on a personal friend's life.
Adam Smith and Wealth
Investing in Stocks
Senada Selmani, model Sentence Openers
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