Investing in stocks is one of the most straightforward and accessible ways to grow your wealth. Whether you’re a seasoned investor or just starting out, understanding the basics of stocks is essential. In this blog, we’ll break down what stocks are, how they work, and how you can potentially make money from them.
What Are Stocks?
Stocks represent shares of ownership in a company. When you buy a stock, you’re essentially buying a small piece of that business. If you own enough shares (say, 5-10% of the company), you could have significant influence over its decisions. However, most individual investors own just a few shares, which still grants them voting rights in shareholder meetings—though their influence is minimal compared to larger shareholders.
Stocks are typically bought and sold on the open market through stock exchanges. Companies initially sell their shares through an Initial Public Offering (IPO) to raise capital without taking on debt. After the IPO, shares are traded between investors on the stock market, not directly with the company.
How Do You Make Money with Stocks?
There are two primary ways to profit from owning stocks:
- Stock Appreciation:
This occurs when the price of a stock increases over time. If a company performs well—growing its revenue, expanding its operations, or innovating demand for its stock may rise. As more people want to buy the stock, its price goes up due to the basic principles of supply and demand. For example, if you buy a stock at €50 and sell it later for €75, you’ve made a €25 profit per share. - Dividends:
Some companies pay dividends, which are regular payments to shareholders from the company’s profits. Dividends are typically paid quarterly and provide a steady income stream. Not all companies pay dividends, but those that do often use them to attract long term investors. For example, if you own 10 shares of a company that pays a $1 dividend per share, you’ll earn $10 quarterly.
How Are Stocks Traded?
Stocks are bought and sold through stock exchanges, such as the New York Stock Exchange (NYSE) or NASDAQ. As an individual investor, you’ll need to use a brokerage platform to access these exchanges. Many online platforms, like DEGIRO, allow you to trade stocks easily, even offering paper trading for beginners to practice without risking real money.
When you buy or sell a stock, you’re not dealing directly with the company. Instead, you’re trading with other investors who are looking to buy or sell their shares. Brokers may charge fees for these transactions, though many platforms now offer commission free trading.
Types of Stocks
Not all stocks are created equal. Here are the two main types you’ll encounter:
- Common Stocks:
These are the most widely traded stocks. Common stockholders have voting rights in company decisions and may receive dividends. However, they are also more exposed to market volatility. - Preferred Stocks:
Preferred stocks are less volatile and often come with higher dividends. However, preferred stockholders usually don’t have voting rights. These stocks are considered a more stable investment but offer less potential for growth compared to common stocks.
What Are ETFs?
If you want to diversify your investments without buying individual stocks, you can consider Exchange-Traded Funds (ETFs). ETFs are collections of stocks bundled into a single investment. For example, a technology ETF might include shares of multiple tech companies. This spreads out your risk and provides more stable growth, though the potential for explosive returns is usually lower compared to individual stocks.
Key Considerations for Stock Investors
Before diving into the stock market, keep these tips in mind:
- Understand Your Strategy: Are you looking for short term gains or long term growth? Your investment strategy will determine which stocks are right for you.
- Do Your Research: Learn about the companies you’re investing in. Look at their financial health, growth potential, and competitive advantages.
- Diversify Your Portfolio: Don’t put all your money into one stock. Spread your investments across different industries and asset types to reduce risk.
- Be Patient: The stock market can be volatile. Focus on long term growth rather than short term fluctuations.
Final Thoughts
Stocks are a powerful tool for building wealth, but they require knowledge and patience. By understanding how stocks work, the different types available, and the strategies for investing, you can make informed decisions that align with your financial goals. Whether you’re buying individual stocks or diversifying with ETFs, the key is to stay informed and think long-term.
