Stocks also known as “shares” or “equity” allow you to buy a certain percentage of ownership of a public company trading on the stock market. The number of shares that you buy would represent a claim on the company’s assets and earnings. Purchasing stocks for the first time can be overwhelming but we hope to make it easier.
When you purchase shares of a public company, you’re known as a shareholder. As a shareholder, you’re eligible to participate in the company’s profits through pay out of dividends plus you’re eligible for voting rights.
Trading Stocks
Millions of stocks are bought and sold each day in the stock market. Shares of public companies may be sold to other shareholders who might be interested in being a shareholder of a particular company. Stock exchanges connect buyers and sellers together through electronic communication networks (ECN) in order to facilitate these transactions.
Purchasing Stocks For the First Time
There are several methods on how stocks can be bought. The two most common methods are either through a online brokerage or through a stockbroker. It all depends on your comfort level and knowledge of stocks.
- Online Brokerage – Interested individual can open an investment account at an online discount broker. These discount brokers typically charge less than $10 per stock trade. They do not give investment advice and are not responsible for the performance of your investments. Discount brokers are for individuals who are sophisticated and can do their own fundamental research on a company’s profitability themselves.
- Full Service Brokerage –If you’re not comfortable in doing your own stock purchases, you may utilize a full service brokerage. These full service brokers typically charge a higher commission per trade but also provide you with investment advice and a personal touch. Brokers can be found at banks, wealth management firms, credit unions, etc.
Selling a Stock For the First Time
Selling a stock is similar to buying. When you sell, you have to be aware of any capital gains that may be triggered. Capital gains are triggered if you’re purchasing your stocks in a non-registered investment account. Selling a stock also involves a commission that gets paid to the broker.
Shareholders
When you are purchasing stocks of a public company, you’re known as a shareholder. As a shareholder, you have ownership stake in the company and are eligible to receive dividends. In addition, you have the right to vote on certain issues relating to the company and be elected on the board of directors.
There are two types of shareholders, common shareholders and preferred shareholders.
Common Shareholders
Common shareholders hold common shares of a public company. Most shares in the public market are owned by common shareholders who have the right to vote during the company’s annual shareholders meeting. The shareholders meeting allows them to vote on issues pertaining to the company and select the company’s board of directors.
Preferred Shareholders
Preferred shareholders own a company’s preferred stock and have no voting rights. They cannot vote on matters that pertain to the company. However, they’re eligible to receive annual dividends before common shareholders. If the company was going through bankruptcy, preferred shareholders are paid first before common shareholders.
Risk Level of Stocks
The majority of people have been purchasing stocks in their investment portfolio. Since 1926, stocks have returned an average rate of 10% annually since 1926. This is a higher return that you would normally receive from other investment instruments such as bonds, which are less risky. Stocks are on the far-right end of the risk/reward spectrum. The more stocks that you’re holding in your portfolio, the more volatile your portfolio will be. However, you will experience a higher return long term if you’re purchasing stocks of established, blue chip companies that have a fairly stable stock price, pay out dividends and are considered relatively safe.
When you’re purchasing stocks, always make sure that you’re comfortable with the volatility and the risk that comes with it. As Warren Buffett says, you’re not purchasing a company but instead you’re purchasing a business.
