This podcast episode on investing in stocks was generated with the assistance of artificial intelligence. The content, discussion, and dialogue are based on a summary of an article at Washington State Dept of Financial Institutions While the podcast features two voices discussing the topic, please be aware that the conversation is AI-generated and not conducted by real people. The AI has been trained to simulate realistic conversations based on the given information. Additionally, the information discussed in this podcast is for general informational purposes only. It should not be considered personalized advice or a substitute for professional consultation. Always consult a qualified expert or professional for advice on your specific situation.
I frequently have clients come to me asking for recommendations on stocks or whether they can purchase a particular stock in their account. The answer to the first question is no, I’m not going to make stock recommendations. But yes, I can purchase stocks for you in your account. If I had a crystal ball that told me what would happen to specific stock prices, I would absolutely make recommendations, but I don’t. Many people don’t have a good understanding of what stocks even are, though, so let’s look at that.
What Are Stocks?
Stocks are a type of security that gives stockholders a share of ownership in a company.
Companies typically sell shares to raise additional capital to grow. This is called the initial public offering (IPO). After the IPO, stockholders can resell shares on the stock market.
Stock prices rise or fall and are typically driven by expectations of the corporation’s earnings or profits.
Types Of Stocks
There are two main kinds of stocks, common stock and preferred stock.
- Common Stocks
Common stock entitles owners to vote at shareholder meetings and receive dividends. - Preferred Stocks
Preferred stockholders usually don’t have voting rights. Still, they receive dividend payments before common stockholders do and have priority over common stockholders if the company goes bankrupt and its assets are liquidated. - Growth Stocks
Growth stocks have earnings growth rates faster than the market average. They rarely pay dividends, and investors buy them in the hope of capital appreciation. A start-up technology company is likely to be a growth stock. - Income Stocks
Income stocks pay dividends consistently. Dividends are a portion of the company’s earnings paid to shareholders. Investors buy them for the income they generate. An established utility company is likely to be an income stock. - Value Stocks
Value stocks have low price-to-earnings (PE) ratios, meaning they are cheaper to buy than stocks with higher PE ratios. Value stocks may be growth or income stocks, and their low PE ratios may reflect that they have fallen out of favor with investors for some reason. People buy value stocks in the hope that the market has overreacted and that the stock’s price will rebound. - Blue-Chip Stocks
Blue-chip stocks are shares in large, well-known companies with a solid history of growth. They generally pay dividends.
Potential Benefits of Investing in Stocks
The potential benefits of investing in stocks include:
- Potential capital gains from owning a stock that grows in value over time
- Potential income from dividends paid by the company
- Lower tax rates on long-term capital gains
Potential Risks of Stocks
The potential risks of investing in stocks include:
- Share prices for a company falling, even to zero
- If the company goes broke, you may be the last to be paid, so you may not get your money back
- The value of your shares will go up and down, and the dividend may vary
How To Buy Stocks
The following are the most common ways to buy stocks:
- Direct Stock Plans Through Companies
Some companies allow you to buy or sell their stock directly through them without using a broker. Some companies limit direct stock plans to employees or existing shareholders. Some require minimum purchase amounts or account levels. - Dividend Reinvestment Plans
These plans allow you to buy more shares of a stock you already own by reinvesting dividend payments into the company. You must sign an agreement with the company to have this done. Check with the company or your brokerage firm to see if you will be charged for this service. - Discount Or Full-Service Broker
Brokers buy and sell shares for customers for a fee, known as a commission. Many brokers run websites where you can buy stocks. - Stock Funds
Stock funds are another way to buy stocks. These are mutual funds that invest primarily in stocks. Mutual fund companies offer stock funds and can be purchased directly from them or through a broker or adviser.
Researching Stocks
Before investing in a stock, it’s a good idea to research the company and the stock’s performance history.
Information you should consider researching includes:
- Annual Reports
One of the best sources of information is a company’s annual report. Review a company’s annual report to learn about its business activities, whether it’s making a profit or loss, and the company’s strategy for the future. - Prospectus
Companies issuing shares are required to file a prospectus with the U.S. Securities and Exchange Commission. A prospectus is a formal legal document that gives details about the investment. - Stock Reports
There are various reports available about a stock’s performance. Ask your stockbroker or investment adviser for more information.
Working with a financial advisor is essential if you don’t understand all the ins and outs of investing. Look for one that is a fiduciary and bound by laws to prove they are working in your best interest.
Find out more about how Phoenix Rising can help you address your finances here!