Investing in stocks


You can buy stock in thousands of publicly traded companies, though chances are your portfolio will include only a tiny fraction of what’s available.

When you buy stock in a corporation, you become one of its owners. If the company does well, you may receive part of its profits as dividends and see the price of your stock increase. But if the stock price falls, the value of your investment can drop, sometimes substantially.

A stock has no absolute value. At any given time, its value depends on whether its shareholders want to hold it or sell it, and on what other investors are willing to pay for it. If the stock is hot, and lots of people want shares, the price will go up. If a company is losing money or a particular industry is doing poorly, those stocks will probably drop in value. Some stocks are undervalued, which means they sell for less than analysts think they’re worth, while others may be overvalued.

Investors’ attitudes are determined by several factors: whether or not they expect to make money with the stock, by current stock market conditions, and the overall state of the economy.

The caution that past performance is no guarantee of future profits is absolutely valid. Investing isn’t about guarantees. It’s about balancing risk with reasonable expectations of reward.

How do investors make money?

Investors buy stock to make money:

  • Through dividend payments while they own the stock
  • By selling the stock for more than they paid

Market cycles

The stock market goes through cycles, heading up for a time, and then correcting itself by reversing and heading down. A rising period is known as a bull market – bulls being the market optimists who drive prices up.  A bear market is a falling market, where stock prices fall by 20% or more and may remain depressed. Overall, the market has tended to rise higher following a fall, though it sometimes takes a long time even to reach its previous high. And bear markets can take a big bite out of your portfolio’s value.

Investor concerns

Some people hesitate to invest in the stock market because they consider it too risky. Afraid of choosing the wrong stock or being battered in a bear market, they prefer to stick with investments they consider safe.

The problem with that approach, experts agree, is that by skipping stocks, investors are missing out on a potential source of long-term gains. While you could lose money in individual years or on a single stock, investors who have held a diversified portfolio of stocks through any 15-year period since 1926 have generally come out ahead.

Usually, the greater danger is not sticking with stocks. Investors who sell their shares when the market drops, rather than riding out the downturn, have been more likely to lose money than people who left their portfolios alone, or those who bought additional shares when prices were depressed.

Tax issues

The dividends you earn on stocks and any capital gain, or profit, you have when you sell are taxable in the year you execute the trade unless you bought the stock through an IRA or tax-deferred retirement plan.

However, qualifying dividends, including dividends on most US stocks, and long-term capital gains are currently taxed at a maximum federal rate of 15% if you’re in the 25% through 35% tax bracket, 0% if you’re in the 10% or 15% bracket, and at 20% if you’re in the 39.6% bracket.

When some investors choose a stock, they keep it through thick and thin, a strategy known as buy and hold. Other investors buy and sell regularly. Their approach is to select stocks they think are going to increase in value. When the prices goes up a certain percent – 15% to 20% is often typical, though you can set your own guidelines – they sell and buy something else. Both approaches work, though it’s generally a good idea to decide which approach you have in mind for each investment you make.

Stock opportunities

You can select stocks on your own, with the help of your financial adviser, or as part of an investment club.

Most clubs are formed by friends or associates with similar investment goals. By pooling their money — usually a fixed amount each month — and sharing responsibility for researching various companies and industries to find smart investments, the group may be able to achieve greater diversification than most investors can manage on their own.

Some groups work with brokers or investment advisers or invite people with different investment expertise to speak at their meetings. Others pride themselves on their ability to choose wisely among themselves. And as an added plus, some investors use their colleagues’ research to make individual investments in addition to those made through the group.

 

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