Investing for Beginners – Stocks

Now that we have gone over how to open up a brokerage account and how to figure out what type of portfolio we feel comfortable with, we have officially reached the fun part of investing. There are so many ways to make money investing in 2020. As an investor, you are able to choose from a long list of investments to invest your hard-earned money. Will you pick a specific asset class like stocks? Alternatively, will you concentrate on a specific industry like Healthcare? There are so many options! We have gone ahead and made a simplified list of the options, with each one having their own post, open to everyday investors who are looking to make a return on their money over a couple of years. 

Stocks – Easy/Medium Difficulty

Stocks are shares – or parts – of a company that are publicly listed – meaning that they are available to trade by everyone through a stock market or stock exchange. When you purchase a stock, a transaction occurs where you receive a small stake or ownership in the company in exchange for you providing a small amount of funding that they can use to grow. As an example, there are currently 17,337,340,000 shares of Apple that make up 100% of the company. This means that if you were to buy all 17,337,340,000 shares, you would own the entirety of Apple and would be able to decide what direction the company would go in the future. In this example though, it would be very unlikely that you would be able to buy all shares of Apple as they are held by both investors and companies alike. But, assuming we stay with this example, if you were to buy a single share of Apple, you would technically own 0.0000000058% of Apple. So why do you want to own stocks in the first place? Well, when you buy a stock or shares of a specific company, this ownership comes with voting rights – meaning that you have a voice in how the company is being run and you have the ability to vote and elect a board member to the company’s board of directors – and you also receive a portion of the profits that the company earns through EPS or earnings per share. So the main reason why you want to own stocks is the potential to make a profit on your invested capital (money) and to have a say on how the company is being run.  

When you look at the long-term benefits of stocks, you note that they have a higher return – more money in your pocket – compared to other investment options because of their ability to appreciate (or increase) and provide capital gains. Capital gains occur when you purchase a stock at a fixed price and it increases. Also, when a stock price decreases, this is referred to as a capital loss. As an example, if you were to buy 100 shares of Company A at $1, you would have $100 worth of Company A shares. Now Company A has a great year and makes a 20% profit. As an investor, you would benefit from this great year with the shares of the company increasing by 20%. Therefore, instead of having 100 shares of Company A at $1, you would have the exact same amount of shares but at $1.20. This would mean that you would have $120 worth of company A shares which would be equal to a 20% return on your money as your shares are worth $1.20 rather than $1. You would be able to pocket this profit if you do decide to sell your shares and claim your capital gains. 

Please note that there are two types of capital gains: realized capital gains and unrealized capital gains. The only notable difference is that in the example above, we have increased our value of Company A shares from $100 to $120. This means that we now have an unrealized capital gains of $20 – the difference between how much the shares are worth now and how much we paid for them – but we do not have a realized capital gains as we have not sold these shares and received any money from the increase in profitability of Company A. If we were to sell these shares, than we would have a realized capital gains of $20 and would pay taxes on our profits at the end of the quarter or year.

Although stocks tend to rise year over year and are extremely profitable, there is the potential for the stock to drop in price all the way down to $0. If bankruptcy occurs – meaning that the company is no longer able to survive and its stock drops to $0 – this means that you lose your investment in this specific company and you do not receive any return on your investment. Although bankruptcy does not occur often, it is a possibility that you should take into account when reviewing potential stocks.

There are actually two factors that affect the stock price: 1.) The financial health of the company and; 2.) market speculation. If the company is doing very well and remains profitable, the stock price will increase. If people begin speculating that this company will develop products that will benefit the general population, this market speculation will  cause the stock price to increase. Please note that there is an unlimited potential for the stock price to increase but that these factors can also negatively affect the stock price too.

Historically speaking, stock markets have provided an 8-10% annual return and have remained relatively liquid – meaning that you are able to buy and sell different companies relatively quickly if you are not happy with a specific company’s returns – and these are the reasons why they are so attractive to the everyday investor. Investing in the stock market is a great opportunity for people who are looking for ways to build wealth and help shelter their money from inflation. The stock market is a great place to build wealth but like everything else, the earlier you start, the better your chance to accumulate more wealth.

Overall, there are many types of investments that are available to a regular investor. It is up to you to take into account how much time you are willing to spend analyzing and deciding what type of investment options work for you. There are some options that are easier – and safer – but might not provide as big of a return on your money. There are also pros and cons to each option and it is up to you to figure out what option is best for you in your current financial situation. Do not forget that as your situation changes, your investment options will change too.

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