Basics of the Stock Market:
Things You Should Know Before Investing in Stock
By: Camaran Azumara
Wouldn’t it be great to watch your money grow while you’re sleep? Sit back and imagine yourself collecting the dividend checks as money rolls in as your invested companies grow. That’s not a bad ideal course of action right? If you’re into growth in your money this article is for you. This may all seem like a pipe dream, but it is closer to reality than you may think. If you were wondering or guessing what we were talking about, we are talking about the stock market. Arguably, the stock market is the best wealth creator in the world, yet it remains one of the most confusing and elusive concepts for many Americans.
Here are four concepts and terms that all investors should know
These terms and concepts should be understood before investing a dime of hard-earned money in the market.
- This is a must to know when investing because it can be a massive impact on how you control your stocks.
i.When it comes to consumers, they are typically comfortable with the concept of buying a stock and betting the value of their shares will rise over time. If a stock price moves up you make money, while if it moves lower you lose money. However, there is a completely different side to trading that you may not be aware of. When you short sell this allows you to bet against stock, such that if the price goes down you make money, while it rises you lose money. Your broker will sell shares of stock, either from its own account or the account of one of the firms’ customers. Once this is done, the sale and the proceeds are credited to your account until you buy back the same number of shares (this is known as “buy to cover” trade) to close the position. Remember, though, while your losses are limited to 100% when buying a stock, and your profit potential is unlimited a short-sale allows a max profit of 100% (stock prices don’t drop below 0$) and unlimited loss potential. Choose your bets wisely!
2. The differences in Growth stock vs. value stock
- One of the toughest decision you’ll need to make as an investor is determining what your tolerance of risks is. If you’re a young millennial you’re more liable and willing to take risks when you invest, while with older adults they are more likely to focus on capital preservation and safer investments. From this point this is where an understanding of value stocks versus growth stocks comes into play. A growth stock is normally going to be changes relative to the broad-market indexes, and growth is often tied to the health of the U.S. economy. When it comes to growth stocks they are typically found in sectors like technology and biotechnology. Growth stocks de-emphasize dividend payments in exchange for reinvesting their cash flow back into their businesses. Growth stocks normally come with a lot of risk, but they pay the greatest rewards when successful. A value stock is perceived to be far less volatile than growth stocks. Instead of huge growth prospects, value stocks are normally mature businesses with steady growth prospects that emphasize shareholder yield (dividends plus share buybacks) over rapid business expansion. By name, value stocks are valued attractively relative to both peers and the overall market.
3. The differences of Inflation vs. Deflation
- When it comes to these terms they determine the effect that consumers are noticing on the prices of the goods and services they buy. Inflation refers to the rising price of goods and services, while deflation refers to a situation where the prices of the things we buy are falling. Typically this only happens during a recession.
4. Record date vs. Ex-dividend vs. date of payment (Where you make your money baby!!)
- When you invest in individual stocks, or even ETFs chances are good that at some point you’re going to receive a dividend payment. Once a dividend has been declared by a company in your portfolio the next important date will be the ex-dividend date. This is the second business day before the record date, and is the first day on which a stock will trade without its dividend. For example, let’s assume a stock is paying a $1.00 quarterly dividend and it closed at $50.00 per share the previous day. When it opens for trading on the ex-dividend date it’ll open at $49.00, since the $1.00 has been removed for the upcoming dividend payment.
- The record date is when companies reconcile their shareholder list to determine which shareholders will receive the dividend payment.
- The date of payment is exactly what it sounds like: the day the dividend is actually paid to the shareholders who are entitled to receive it. In order to receive a dividend you have to buy a stock at least three business days before the record date.
Knowing these stock market basics will put you on the right track to taking charge of your investments. Since you now have these 4 key points, go out and take great action for your financial health. Create your own system when it comes to investing and let the money flow in your sleep my friends!!
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Sean Williams. “Stock Market Basics”, Jun 13, 2015
Investopedia Staff. “Stock Basics”, 2016