When people ask me about stocks, they mostly want to know my opinion about investing in specific companies.
One thing I rarely get asked about, but that’s actually really important, is how stocks work. Stocks are the backbone of a lot of investment portfolios. And while many people know what stocks are in theory, a lot of people don’t understand some of the basic terms and concepts around investing in stocks.
As a result, I’ve put together a quick primer on stocks. Think of it as Stocks 101.
When you own stock in a company, you essentially own a small part of that company. In other words, you own a share of the company. To put it another way, you have an equity stake. This is one reason stocks are also referred to as equities.
When the company performs well as a whole, it often increases in value. When that happens, your share of the company also increases in value. That increase is how you hope to make money, and it’s the most basic principle of equity investing.
How to Buy Stock
To invest in a publicly traded company on your own, you need to go through a brokerage company. Whereas you may have called a stockbroker in the past, you can now do this online. For example, you could buy stock from companies like E-Trade, TD Ameritrade, or Robinhood by opening a brokerage account. Be sure to look at the fees and/or commissions the brokerage company may charge you per trade, since these can eat into any potential profits or add to any potential losses.
When I have clients interested in owning individual stocks, I recommend they carve out a chunk of money to invest, and think of it as play money, versus pay money. If you’re looking at how to get started, the simplest approach is to buy what you own. For example, if your closet is filled with one brand of clothing, you might consider buying stock in that company to start.
If you use a brokerage account to buy or sell stock on your own, there are a lot of logistical elements to trading — market orders, limit orders, and so on — that may seem complicated for someone who’s new to investing. It’s one of the many reasons some individuals prefer to have help when they invest.
Another way to buy stock is through an investment advisor, like me. This can take some of the stress out of the process, since we worry about logistics, like order type and timing.
In general, I prefer to invest in funds that track a wide array of stocks, versus individual stock picking, since it tends to offer better results for my clients. This helps us stay focused on their goals, as opposed to the performance of a single stock.
Types of Stocks
Your goals, and how you think about investing, drive the equity strategy we create. That, in turn, influences the stocks I look to include in your investment portfolio. The following are high-level summaries of three common categories of stock. (Keep in mind these definitions are brief — entire books have been written on the subject of each).
Growth stocks are expected to generate revenue and profit at a faster rate than other companies. They often carry more risk as a tradeoff for potential rewards. These days, growth stocks tend to be in innovative industries like tech or bio.
Income stocks are also referred to as dividend stocks. When a publicly traded company reports a profit, some companies reinvest those profits back into the company to encourage growth. Others pay out a portion of profits to shareholders in the form of dividends. These are commonly paid quarterly. Investors hoping to collect income from their investments without selling shares look for companies that pay consistent dividends.
Value stocks are the type of stocks an investor like Warren Buffett looks for. Essentially, these are stocks whose price is cheap relative to their inherent value. Investors and analysts look at the fundamentals of a company, and if the stock price islow, they buy shares in hopes that the price will increase to reflect the company’s true value. True value stocks can be challenging to find.
Of course, there’s a lot more to stocks and investing than what we’ve covered here. However, this should help you better understand some of the common types of stocks and how to approach investing in them.