September 28, 2022

Journal Fact

Journal Fact Blog

Everything You Need to Know Before Investing in the Stock Market

3 min read
stock market

Last Updated on June 22, 2022 by Journal Fact

Stocks or equities give stockholders a share of ownership in a company. And investors acquire these stocks for various reasons, including:

Capital appreciation as a result of a rise in stock prices.

Dividend payments to shareholders where the company distributes a share of its annual earnings.

Voting rights and influence in the company.

Companies issue stocks to raise funds to pay off debts, launch new products in the market, expand into new regions, or enlarge facilities or acquire new ones.

Investing in Stocks

The goal of investing is to set aside money in one or more investment avenues hoping to grow your investment portfolio over time. In this article, you can learn how to start with stock investing and maximize your opportunities with minimal risks of losses.

The stock market is the perfect place for beginners to gain investment experience. And before you start investing, you need to set your investment goals and know the level of risk you are comfortable taking.

Types of stocks

There are two main types of stocks.

1. Common Stock: Shareholders have voting rights during annual general meetings and are entitled to receive dividends.

2. Preferred Stocks: Shareholders don’t have voting rights; however, they receive share dividends before common shareholders and are the first to receive compensation during the liquidation.

Besides these two categories, stocks are classified further into growth, income, value, and blue-chip stocks. The two main stock types can fall under any of these four categories. Here is a detailed breakdown of these stock types.

Growth Stocks: Earnings grow faster than the market average, thanks to capital appreciation. However, these stocks rarely earn dividends. A good example is a startup tech company.

Income Stocks: These earn dividends and attract more investors. An example may include an established utility company.

Value Stocks: they have a low price-to-earnings ratio. And they may reflect a high investor fallout from the company. And new investors may buy these shares, hoping for a market rebound.

Blue-chip Stocks: Large, established brands offer these shares that generally pay dividends.

The Benefits/Risks of Investing in Stocks

If you’re investing for the long haul, there’s immense growth potential, although this is not always the case. While a company may not end up bankrupt and liquidated, the prices are susceptible to fluctuation, either up or down.

Market fluctuations may be due to internal factors such as a faulty company product that could discourage more investors. But it may also be due to external factors such as politics, which the company has little control over.

Trading in the Stock Exchange

The stock exchange is both a primary and secondary market for trading stocks. As a primary market, companies can raise capital through the Initial public offer (IPO). And as a secondary market, companies can sell or buy back some of their shares, while existing shareholders can meet potential buyers and trade.

The stock market ensures fair pricing, price discovery, transparency, and liquidity in share and bond transactions. And for every transaction, the stock exchange earns a fee from secondary market activities.

For efficient market activity within the exchange, different experts facilitate various operations. These are:

Stockbrokers

Portfolio Managers

Investment Bankers

Custodians

Speculators

Arbitrageurs

Conclusion

The stock market is a crucial component of any free-market economy, allowing companies to raise capital while investors have the opportunity to increase their investment portfolio. By offering a level playing field to companies and individuals, they can participate in productive investment opportunities.

You can read our blog to learn more about Stock market investing and the investment opportunities within the stock exchange.