History has shown that investing in stocks is one of the easiest and most profitable ways to build wealth over the long-term. With a handful of notable exceptions, almost every member of the Forbes 400 list got there because they own a large block of shares in a public or private corporation. Although your beginning may be humble, this guide to investing in stocks will explain what stocks are, how you can make money from them, and much more.
What Is Stock?
Have you ever asked yourself, “What is stock?” or wondered why shares of stock exist? This introduction to the world of investing in stocks will provide answers to those questions and show you just how simple Wall Street really is. It may turn out to be one of the most important articles you’ve ever read if you don’t understand what stocks represent
How Do I Actually Make Money from Investing in Stocks?
You probably know that investing in stocks is a way to get rich but very few new investors actually realize how you make money from your shares of stock. Now, you don’t have to wonder any longer. Let us show you the two ways you can profit from owning and investing in stocks, and some of the factors that determine how fast a company grows
How to Invest in Stocks
Like many new investors, you’ve decided to invest in a company and pick up your first shares of stock, but your limited knowledge leaves you wondering how to actually do it. Don’t worry! This overview was designed to help you learn precisely that – how to invest in stocks. To be more specific, for you new investors out there, this page was put together to serve as an introductory depository of investment articles designed to get many of the basics out of the way before moving on to some of the more advanced topics which I’ve written over the past years.
I created it as part of The Complete Beginner’s Guide to Investing in Stock and it provides a short checklist of topics, complete with links to much more in-depth articles, where you can study whatever it is you want to research about investing in stock.
Once you are ready to move on from these resources, you can check out the nearly 1,000 articles I’ve written on this site as well as the thousands of articles I’ve posted on my personal blog, which covers more advanced business, finance, and investing topics.
The Four Major Ways to Invest Your Money in Stocks
There are typically four major ways to invest your money in stocks:
Investing through a 401k plan or, if you work for a non-profit, a 403b plan
Investing through a Traditional IRA, Roth IRA, Simple IRA or SEP-IRA account
Investing through a brokerage account
Investing through a direct stock purchase plan or dividend reinvestment plan (DRIP)
The Five Types of Assets You Might Own When You Invest
Generally, there are five types of assets the average investor is likely to own in his or her lifetime, whether or not he or she invests in these assets directly or through a pooled structure such as a mutual fund, index fund, exchange traded fund, or hedge fund:
Common stocks – When you invest in stock, you acquire an ownership stake in an actual operating business, along with your share of the net earnings and resulting dividends produced by the firm. Although you don’t have to invest in stock to get rich, over the past could of centuries, equities (stocks) have been the highest returning asset class and have produced the most wealth. To learn more, read What Is Stock?, which will break down the fundamentals.
Preferred stocks – Preferred stock is a special type of stock that often pays higher dividends but has limited upside.
Bonds – When you lend money to a country, municipality, business, or other institution, you buy bonds such as corporate bonds, municipal bonds, savings bonds, U.S. government Treasury bonds, etc.
Money markets – highly liquid investments that are designed to protect your purchasing power. They are considered a cash equivalent. There are two varieties, money market accounts and money market funds. There are also at least five other alternatives to money markets.
Real estate investment trusts or REITs – a special type of company designation that allows no taxation at the company level provided more than 90% of earnings are paid out to the shareholders. The assets are often invested in a variety of real estate projects and properties.
The Importance of Research When Investing in Stocks
When researching an investment there are typically five documents you want to get your hands on to research the relative merit of a potential stock:
The Form 10-K – this is the annual filing with the Securities and Exchange Commission (SEC) and is probably the single most important research document available to investors about a company.
The most recent Form 10-Q, which is the quarterly version of the Form 10-K.
Proxy statement – includes information on the Board of Directors as well as management compensation and shareholder proposals
The most recent annual report – read the report from the Chairman, CEO, and sometimes CFO or other high-ranking officers to see how they view the business. Not all annual reports are created equally. Generally, the best in the business is considered to be the one written by Warren Buffett at Berkshire Hathaway, which you can download from free on the holding company’s corporate site.
A statistical showing going back five or ten years. Several firms prepare this type of information in easy-to-digest formats, mostly for a subscription fee. Some of the major research houses and products include Morningstar, The ValueLine Investment Survey, Standard and Poor’s, and Moody’s.
The Three Financial Statements Necessary For Stock Investing
There are three financial statements you’ll want to examine closely before you buy an ownership stake in a company by investing in its stock. These three are:
The income statement
The balance sheet
The cash flow statement
All three financial statements work together and reinforce one another so you cannot study them in isolation or you will find yourself making decisions based on partial data; a mistake that can be costly, especially when you decide to invest in stock rather than a more senior security higher up in the capital structure, such as a bond.
Some Other Tips and Helpful Resources for New Investors Investing in Stocks
Finally, there are some things you’ll want to look for in a company and management before you buy shares of stock:
7 Signs of a Shareholder Friendly Management – What to Look for and Why
Ten Part Guide to Beating the Market
Making Money in Bad Companies
7 Keys to Successful Investing – Basic Principles for Superior Results
Invest in What You Know
Rationality: The Investor’s Secret Weapon
Business-Like Investing: Thinking Like an Owner
The Investor’s Manifesto
There are a few other things you may want to pick up on your investing journey:
Intro to Stock Trading
10 Steps to Building a Complete Portfolio
Again, if you want to learn more about how to invest in a stock, check out the directory of Investing for Beginners articles I’ve written, sorted by topic or head over to my personal blog for some of the more esoteric or advanced topics that aren’t particularly appropriate for beginners. Whatever happens, remember that stocks are only one of many types of assets that you can use to build wealth and become financially independent.