Buying and selling stocks are a great way to get extra income or create a nest egg for your retirement later in life. However, if you’re just getting into the stock trading game, the whole thing can seem a little complicated. When it comes to buying and selling stocks, there are some basic facts you need to know. Here is an overview of how to get involved with trading.
You’re purchasing part of a company.
When you buy stock, you’re buying part of that business. You have the same rights and responsibilities as everyone else who purchases the stock. If the company is on the road to success, you have the right to know. If there's a chance the company is at risk of failure, you should also be informed of this. However, it’s up to you to stay updated on the company where you purchased stock.
Stocks can grow.
When you think of stock, you may think of the long-term goal of capital appreciation. Capital appreciation is the value of an asset and is based on the rise or fall of market price. Stocks do grow in this sense, but they also increase in value based on dividends. Dividends are payments made by a corporation to its shareholders, usually in the form of additional shares rather than cash. Capital appreciation and dividends together are referred to as the “total return.”
Stocks rise and fall.
When you participate in the stock market, there is a chance for your stock to both rise and fall in value. Unfortunately, if your stock is going up, it’s meaningless if it doesn’t outpace inflation.
There are two ways to buy stock based on the rise and fall of the market. If you purchase stock that is extremely low, this is what’s called “value investing.” If you buy a stock that is on the rise, in the hope that it’ll continue its trajectory, you’re participating in “momentum investing.” Both methods of investment are useful depending on your investment style and the level of risk you’re willing to take.
Stocks aren’t tax-free.
If you’re unfamiliar with stocks, you may not know that stocks are taxable. Just like any source of income, you must pay taxes on your investments unless you own them through a qualified retirement account. You’ll pay taxes on any gains you acquire, as well as all dividends you collect.
Stocks can be volatile.
Of course, we all know that when stock plummets, things are bad, but stocks can also shoot up in just a short amount of time. This situation isn't uncommon and happens because stocks are very volatile, meaning they’re subject to change during a short period. The rise and fall can be similar to bonds although stocks are likely to change much more quickly, making them more volatile. While this sounds bad, it’s actually good because it means your stock has the potential to appreciate over longer periods of time. Because of the chance of extreme changes in value, stocks are also seen as a risky venture.
