If the word "stock" makes you think of people in suits jumping around on the trading room floor and little else, then you need to learn more about what stocks are before you get involved in the trading game. A stock is a share of company ownership. The second you buy one, you become a business owner -- even if you only hold a small chunk of the company. Because investing in stocks means investing in businesses, you need to know about general investing principles and specific company metrics to consider yourself well-informed.
1. Read publications dedicated to investing and financial news, such as "The Wall Street Journal." If you run into terms you don't understand, the context of the article and the Internet can help you decipher what you're reading. The more you read about the country's financial landscape, the better you'll understand investing and stock ownership.
2. Sign up for online investor education courses. Steve Schaefer, a writer for "Forbes" magazine, points out that many online brokers now offer high-quality investor education that you can access just about anywhere. Webinars, articles and videos from websites such as TD Ameritrade and E*Trade can help you understand stocks, as well as other investment options.
3. Learn and use the lingo associated with different stock types. The more you use industry vocabulary, the better equipped you'll be to analyze what you read and assess company offerings. Large-cap companies are structured and stable firms, while small-cap corporations are less well-established, but have greater profit potential from a shareholder perspective. Growth stocks are shares in rapidly growing firms, while value stocks are lower-priced investments that are selling below their intrinsic values. Cyclical stocks rise and fall erratically due to inconsistent demand. For example, steel company stocks are usually cyclical. Stocks also get categorized by industry.
4. Review websites for companies that interest you. Look for a evidence of a strong mission and vision, as well as products or services that are consistent with what the company is trying to achieve. Understand what the company does to make money. By assessing long-term planning and knowing a company's business model, you can judge whether the current stock price is reflective of the business' management and profit potential.
5. Read annual reports for companies that look like safe investment bets. Analyze the company's debt load. A financial leverage ratio higher than five suggests that interest payments could undercut the company's profits in the future. Look at sales numbers. Companies with $1 billion in sales are usually less risky, but those with lower sales levels have the potential for significant investor returns if they continue to grow. Assess the return on assets (ROA) figure to determine profitability, which MSN Money writer Harry Domash says should be 10 percent or higher.
6. Choose a broker who provides the level of expertise you need to invest wisely. While discount and online brokers let you buy stocks for a relatively low service fee, you won't get much in the way of investment guidance. Full-service brokers provide advice and will help you develop a portfolio of stocks to meet your goals. Going with a full-service broker when you're first learning about stocks helps you get informed enough to make more independent decisions in the future.
- Stocks have more potential for high growth than other types of investments.
- Before you delve into learning about the specifics of stock trading, know that stocks aren't risk-free investments. You could lose your initial investment if markets collapse or you make a poorly informed choice. The best way to mitigate risk is to hold stocks from a number of different industries, rather than putting all of your eggs into one basket.
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