If you have ever dipped your toes in the financial world, then you will have probably heard the term ‘investing’, especially when people are referring to stocks. That being said, why is investing so important these days, and what is so good about stocks? How can stocks come to benefit your portfolio and financial situation? Before you dive on through into the world of investing, here we have listed an overview of everything you need to know first.
What are stocks?
In a simple nutshell, a stock represents a fraction of ownership of a company, and you can purchase this on the stock exchange. This means that you have access to the company’s earnings based on the amount of stock that you hold. For example, if a company ended up issuing 100 stocks and you own one of them, then you own 1% of the company.
Stocks are generally the main financial instrument that most people invest in and constitute the majority of an investor’s portfolio. The great thing is that companies that issue stocks are tightly regulated in order to prevent fraud. Stocks are also easily bought on the stock exchange.
Why do companies issue stocks?
For the most part, companies issue stocks in order to raise funds, whether they are planning to grow their business, expand their products and services, or to pay off debt. However, a company can only issue stocks if it has gone public. To do so, a company needs to launch an Initial Public Offering (IPO) where the company can start to raise money from public investors. After the IPO has been launched, the stockholders can then resell their shares on the open stock market.
That being said, not all companies are listed on the stock exchange. This is because an IPO can only be initiated when a company has reached a unicorn status, meaning that it is valued at $1 billion. So, you most likely will not see any independent boutique stores listed on the stock exchange, and why large conglomerates such as Amazon, Tesla, Google, and Meta, are instead.
The great thing about companies issuing socks is that they can use them to generate a significant amount of capital for their business. This is beneficial to both the returns of early investors as well as the company as a whole.
How do you trade stocks
Stocks are predominantly bought and sold on the stock exchange. This is a system and central hub where individual retail investors and institutional investors can meet to buy and sell stocks. The stock market is designed to make trading accessible and easy – even to novices – in order to facilitate liquidity in the marketplace.
In the past, most stock exchanges were actual physical locations and involved traders shouting offer and bid prices. However, with technology advancing so rapidly nowadays, most trades and investments are now made electronically. The good news is that this change has made the stock market even more transparent and easier to understand and get the hang of for retail investors. Even more, stocks and other financial instruments can be traded almost anytime, anywhere, and investors can see how their transactions are doing in real-time.
Why should you invest in stocks?
Investing in stocks brings plenty of benefits to those willing to try it out for themselves. Here are a few major ones below:
Take advantage of a growing economy
If you start investing in stocks, you can begin to take advantage of a growing economy. This is because as an economy grows, corporate earnings tend to follow. With economic growth, comes new opportunities and jobs, which in turn creates more income and more sales. When people have more disposable income as a result of having a higher paycheck, they are more likely to go out and buy things. This drives up consumer demand, which puts more revenue into a company’s cash registries. Plus, if a company continues to do well over the years, this will likely be reflected in its stock price, which an investor would be able to take advantage of.
To beat inflation
As most people would say, if your cash is just sitting in your account and you are doing nothing with it, its total value will eventually depreciate due to inflation. For instance, the inflation rate has generally been at around 3.1% annually since 1913. Fortunately, most returns made through the stock market often can significantly outpace the rate of inflation. Therefore, most experts would agree that investing in stocks is a way to hedge against rising inflation in today’s current economy. You can do this by using a simple buy-and-hold strategy, which can be effective even for first-time investors and novices.
The market is liquid and diverse
The stock market allows people to buy and sell stock at almost any time, without needing to spend a lot of time finding buyers or sellers for their securities. In contrast, this cannot be said for other assets such as real estate or other long-term debt instruments. As such, most economists would describe this market as being ‘liquid’. This means that investors can quickly turn their shares into cash, with low transaction costs.
Additionally, the stock market is incredibly diverse. It offers a range of different financial instruments, such as shares, mutual funds, bonds, and other derivatives. Each asset has its own risk level, which means investors can invest as per their own risk appetite and financial goals.
The great thing about diversification is that it can help to protect investors against risk, as it reduces portfolio concentration. A well-diversified portfolio allows investors to leverage growth in a variety of different sectors of the economy (for instance, technology and healthcare). This means that even if one industry or sector is doing poorly, another industry can make up for any losses that occur.
You can gain dividends
Dividends are the earnings distributed by the company that an investor has invested in, and are a source of income for many people. Dividends tend to be paid every quarter and are a way for companies to distribute a part of their earnings to shareholders. This happens even when the stock has fallen in value.
Dividends can also offer several unique benefits. For instance, they can increase the total return on your investment in a particular company’s stock. They can also help to lower volatility in stock prices. Overall, consistent dividends generally indicate that a business is stable and continuing to grow. Most people usually fund their retirement or increase the value of their portfolio by using these dividends.