Most people know what a stock is, at least in theory. But if asked to define it, many have a hard time. We want you to feel confident talking about stocks, the stock market and more, so created this cheat sheet.
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 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 increases in value, too. That increase is how you hope to make money and the most basic principle of equity investing.
While it’s possible to get equity in a company through private investment, the most common way is by investing in a publicly-traded company.
There are a few ways to do this.
If you want to invest on your own, you need to go through a brokerage. Whereas once upon a time, you called a stockbroker, you can now do this online. Be sure to look at what fees and/or commissions the brokerage might charge you for any trades placed before you get started, since these can eat into any potential profits or add to any potential losses.
Once you have a brokerage account, there are a number of different ways to buy or sell a stock — market orders, limit orders, and so on. These can feel complicated for someone who’s new to investing. That’s one (of many) reasons individuals may prefer to have help when making investments.
“If somebody is dedicated and disciplined to put in the time, they may not need an advisor to buy and sell stocks,” said Wealthbridge founder Tim Randle. But there is value to be had by working with a professional.
When you buy a stock via a registered financial professional, like our firm, it can take some of the stress off, since the firm worries about the logistics (like order type and timing).
“We offer a team approach to picking stocks and timing investments,” Randle points out.
Ultimately, though, it can be a matter of personal preference. Some investors choose to buy and sell stocks in their own brokerage account while also working with an investment advisor. Others buy and sell stocks to start, as a way of learning about investments, before handing it over to a professional portfolio manager.
The Wealthbridge point of view is simple, according to Randle: “Even if we handle the buying and selling, we want clients to understand the basics, so we can talk through the decisions that affect your money.”
Types of stocks
While most people hope to make money from investing, your goals, and how you think about investing, can determine the types of stocks you choose. The following are high-level summaries of three common categories of stocks.
Before we get to that, though, there’s one thing worth noting. “These terms are used a lot when we talk about strategy with clients,” said Randle. “But we almost always use a combination of growth, income, and value stocks to help investors reach their goals.”
Growth
Investors willing to take on risk in the hope of big gains may look for growth stocks. Investors expect growth stocks 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
Income stocks are also referred to as dividend stocks. When a publicly traded company reports a profit, some reinvest those profits back into the company for 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
Investors hoping to find a good deal look for value stocks. 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 looks low, they buy shares in the hope the price will increase to reflect the company’s true value.
In terms of how you combine them: “I would suggest even the most conservative investor should have a growth component. And even aggressive, young investors can benefit from dividend-paying income stocks,” said Randle.
What we’ve talked about here is a very broad overview of stocks, and there’s more that can be said. But, said Randle: “When you look past all the market reports and financial headlines, stocks are one of the most basic financial tools we have to help clients build wealth and meet their goals.”