The New York Stock Exchange was first founded in 1817. Since then, it and other stock market exchanges have become an integral part of the world economy. When getting into trading stocks, there’s a lot of basics to know first. You can get started with this guide.
The Definition of Stocks
Stocks are a type of investment that represent your portion of ownership in a company. Companies offer shares of stock in order to invest in their growth and make more money. Investors can benefit from stocks when their value rises. The idea is to buy a stock at a low price and then sell it when it increases to a higher price. This difference in price is how much return you make on your trade.
How the Stock Market Works
Image via Flickr by jjbers
Stock markets are where you can buy and sell stocks. They consist of different exchanges, such as the New York Stock Exchange and NASDAQ. To trade through these exchanges, you must work with a brokerage firm. Their team of financial professionals makes trades on your behalf. When you invest in different stocks, you want a broker who can offer you support and guidance.
Types of Stocks
Get to know the main types of stocks to understand your trading decisions:
- Common Stocks: Investors own a share of the company’s profits. They get special rights to vote on company decisions and earn dividends.
- Preferred Stocks: Investors are paid a fixed dividend and get preferential treatment in situations like bankruptcy and liquidation.
- Over-the-counter (OTC) stocks: These are stocks that you trade on one of the three OTC markets. Small businesses tend to sell OTC stocks since the OTC market is easier to enter than national securities exchanges.
- Penny stocks: Stocks that trade for less than $5 per share are penny stocks. You’re more likely to find these through OTC transactions than the New York Stock Exchange or NASDAQ.
Stock Trading Basics
There are many important terms to know when trading stocks. Get started by learning these:
- Stock splits are when a company creates more shares by dividing its current ones. As an investor, you would own more shares but have the same amount of value. For example, if you owned one stock that is worth $100 and a company split it in two, you would now own two stocks that are each worth $50.
- Dividends are quarterly payments shareholders receive from companies. This is a beneficial way to earn a steady passive income.
- Blue-chip stocks are stocks of companies well-known for consistently paying dividends. The dividend rates of these stocks tend to grow faster than inflation rates.
Diversifying Your Portfolio
Diversifying your portfolio is an important part of balancing your risk levels. When you invest in high-risk stocks, you can lower your chances of losing money by investing in some low-risk assets. This way you can continue to play your odds and maybe even make a considerable profit. Having a robust portfolio exposes you to more return opportunities and offers a safety net against adverse market cycles.
If you’re a beginner to stocks, these basic concepts can help you get started. As you learn more about how the stock market works, you can begin to make your own smart investments.