April 16: Stock Smarts

by David Jenyns on April 16, 2007

So, you have made the ultimate decision to invest your money into stocks in order to ensure you have a profitable future to forward to. You have probably heard about the stock market all your life on the news, in newspapers, etc. however, in order to properly invest your money, it is imperative to know exactly what a stock is so that you have a high chance of gaining a return on your investment.

Simply stated, a stock is a portion of a company. So, if you buy stock from a certain company or business, you become known as a shareholder, or the owner of a small portion of that company or business. Logically, the more stocks you choose to purchase from a particular company or business, the more you own of that company or business. Therefore, it is highly important to thoroughly research the company or business in which you are interested in purchasing stock to ensure that the company or business is legitimate as well as prosperous.

It is safest to purchase stock from a company or business that is involved with the New York Stock Exchange on Wall Street because it is the largest financial institution in the world. If stock is not being sold on Wall Street, but with a less known institution, it is said to be sold “over-the-counter” which means that the stock is less secure. The less secure a stock is, the more of a chance you have of losing money rather than gaining money, therefore, it is imperative to always invest in stock that is listed on Wall Street.

Most of the time, stocks are issued to businesses in order to raise money in order to expand and grow so that that business becomes a staple for the economy. When a business issues stock for the first time with the New York Stock Exchange, it is known as an initial public offering (IPO), which is underwritten by an investment banker, a professional who decides precisely how much the stock is worth monetarily as well as when it is best to use the stock.

This is why it is so important to purchase stock from Wall Street as opposed to another entity, who sells stock “over-the-counter”, which is not analyzed by an investment banker. Therefore, you have no idea what to expect with an “over-the-counter” investment, but you can rest assured that it leads to losing money rather than gaining money.

Because stock prices seem to mirror supply and demand, stock prices tend to fluctuate on a regular basis due which is known as volatility. As more and more people desire to purchase a certain stock, the prices of that stock tend to rise. However, as particular industries begin to lose money in the economy due to the fact people are not purchasing a certain product, stock prices tend to decrease, making it cheaper to acquire stocks, but the return on investment is low; therefore, you will not make very much money on that particular stock. Therefore, in order to be a smart investor for the long-term, you must buy stocks when they are cheap and sell them when they are worth more than what you purchased them for. For example, you decided to buy 10 stocks in toilet paper priced at $5.00 each. You hold these stocks until you realize that you can sell them for $25.00 each. Logically, you would sell your toilet paper stocks and use the money to invest in another stock.

In order to intelligently choose a company in which to purchase stock, you must take into consideration companies that you know about, businesses where you shop or companies in which you hold in great interest. Once these are identified, you must research them over a set period of time by watching what is reported about that company by the New York Stock Exchange. It is also advisable to compare your company with at least two if its competitors. If you see that a certain company’s stocks are affordable and their stock rates are rising, this in a good indicator to buy as many stocks as possible because you will be able to sell them for more than your original investment.

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