A stock is simply a share of ownership in a company. Your share of ownership of common stock entitles you to vote for a company's board of directors. Since you are a business owner by virtue of being a stockholder, there is no limit on how much you can make as a stock investor. But you can also lose money, too. The more aggressive you are, the more likely you are to experience losses, at least in the short term.
Types of Stock Investors
Two broad approaches to stock investing are growth investing and value investing. Growth-style investors purchase shares of companies that are rapidly expanding. They believe that these stocks have the best potential for price appreciation. They are typically willing to pay more for a given share of stock, compared with earnings, than a value investor. They also occasionally speculate on companies not yet profitable and that have no earnings track record. Value investors, on the other hand, focus on buying stock for less than the intrinsic value of the company, or for a low price relative to the per share earnings. Warren Buffett is an example of a successful value investor.
Approaches to Trading
Some investors have a short-term approach to trading stocks. They typically try to exploit short-term trends in stock prices, and can have average holding times of days, hours or even minutes. These investors are called "day traders." Other investors typically hold onto their stocks for years or even decades. Professional investors can fall into either category, though the more often you trade, the more transaction costs you incur, and the more often you generate a capital gains tax liability.
There are two ways to profit from investing in stock. The first way is by selling a stock for a higher price than you bought it for. You can also profit by holding a stock and collecting dividends. A dividend is a share of the profits the company distributes to its stockholders.
Stocks are extremely volatile. Because each share of stock is a share of ownership in a business, your stock could go to zero if your company goes bankrupt. Any stock could rise sharply or plummet severely in a matter of minutes. Also, unless you focus on dividend-paying stocks, most stocks are not designed to provide regular income for an investor to live on. If the markets decline for a long period, investors trying to live on the proceeds of stock investing may have trouble paying the bills. You could short stocks, theoretically benefiting from falling stock prices. But when you do so, you also expose yourself to potentially infinite losses.
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