What is Stock Investment?

This article was written by a member of the SheKnows Community. It has not been edited, vetted or reviewed by our editorial staff, and any opinions expressed herein are the writer’s own.
Stock investment involves the acquisition of shares of a business corporation by a stock investor, with the aim of obtaining a right to get a share of the company’s dividend. The portion an investor is entitled to will be determined by the ratio of the number of shares he has acquired to the total number of shares available. However, most companies do not pay out profits, instead they reinvest the dividend into the expanding business. These retained dividends mirror in the overall value of a stock.

Owning a company’s shares confers on you the right to vote in the company’s shareholders’ meetings. It also gives you the the right to sell your shares. The more shares you buy, the more voting power you have, cause the biggest shareholders indirectly influence the direction in which the company will go by appointing its board of directors.

Generally, companies issue stock in order to generate the funds to expand their business. However, there are other ways in which companies raise money, such as bank loans and bonds.

Shares and bonds are different in a few ways. While a shareholder is a company’s business partner, a bondholder is a company’s creditor. Hence, in the event of bankruptcy, a bondholder will get a reimbursement of his investment, whereas a shareholder may not receive anything depending on the amount left after every other investor has been paid.

Given that, shareholders often make more gains on their investment than bondholders because while the bondholders are only entitled to constant profits as stipulated by the agreed upon interest rate, the shareholders' dividends increase as the company’s profit margin increases.

What are Long-term and Short-term Investments?

A long-term investment is a company’s investment bonds, stocks, real estate and cash, which is on the asset side of the company’s balance sheet. It is expected to be held for more than a year.

On the other hand, investments are said to be short-term if they are in the current asset section of a company’s balance sheet. The holding period of short-term asset is usually less than one year. Basically, the short-term asset includes stocks and bonds that can be quickly liquidated.

Expectedly, the major difference between short-term investments and long-term investments is that while the former is expected to be sold in a short time (less than a year), the latter may never be sold.

Types of Investments

Generally, investments can be categorized into three fundamental groups, which are: ownership investment, lending investment and cash equivalent investment.

Ownership Investment

This is the most common and most gainful class of investments. To the laymen, this the only form of investment that there is. The following are the examples of investment in this category.

  • Stocks

These are certificates that you own a portion of a company. Upon acquisition, this type of ownership investment automatically confers on you the right to a portion of the company’s dividend.

Market forces of demand and supply are what determine whether your stocks will be profitable or not. The more investors are buying the shares, the higher the value of the shares, which means you can make profits.

  • Business

Little did many people know that the capital they are putting into their start-up businesses is another type of investment. Investing in a startup is one of the most daring kind of investment there is because, it requires more than money to make the investment.

However, its return potential is great. Once you succeed in creating a valuable product or service that can generate enough market, then you are already on the profit roller coaster. It is highly possible for a business owner to make a great fortune out of his business investment.

  • Real Estate

This is the acquisition of properties with the aim of renting them out or selling them. This is another form of investment with a great risk and returns potential at the same time.

  • Precious Objects

Precious metals and artifact items like diamond, gold, valuable artistic paintings constitute another class of ownership investment (provided they were bought with the aim of reselling them).

Lending Investment

This is a type of investment in which you invest by lending to a company with the intention of collecting interests on your investment. The interest is always at a fixed, predetermined rate which makes lending investment a low risk/return investment, unlike ownership investment.

Let’s take a look at a few examples of lending investment:

  • As explained earlier, bonds are a type of investment in which you will be the creditor, and the company issuing the bonds will be the debtor. Bond is an all-around investment, applicable to wide range of investments from the Treasuries and international debt issues to corporate junk bonds and Credit Default Swaps (CDS).

  • Savings Account
    Many people are unaware of the fact that their savings accounts are a type of investment. If you operate a savings account with a bank, you can consider yourself an investor, who lends money to the bank. The bank does business with your money by giving it out as loans. The risk/return in this case, too, is almost zero.

Cash Equivalents

This is a class of investments that can be easily cashed. It has high liquidity and usually

has low risks. Example:

  • Money Market Funds. Money market involves the trade in short-term negotiable instruments like certificates or the US Treasuries securities. Like lending investment, the risk/return here too is negligible.

Steps to Always Winning

The following are sure steps, which, if taken diligently, can guarantee your winning in every stock investment you make.

  1. Set your Financial Priorities Right
    Setting your priorities right is very important before you go into an investment of any type. Never plunge headlong into the ocean of investment without planning your budget first. Planning out your budget is always essential, but in investment its lack is particularly unforgivable. Budget your income and determine what amount you want to invest with. Fortunately, you can start small in investment and continue to increase your stakes over time.

  2. Invest in Your Investment Education
    Invest in yourself. Never invest in anything you don’t know enough about. You don’t have to be a financial expert but you need to learn the basic terminologies of stock investment, such as stocks, bonds, certificate of deposits (CDs), mutual funds etc.

  3. Have Your Goals
    The next thing on the line is to set your goals for investment. Even though everyone invests with the aim of making money, our needs are different. The security of your investment, capital appreciation and reasonable increments in income should be some of the factors to be considered before setting your investment goals.

  4. Set Your Risk Stamina Gauge
    Each person has a different risk tolerance level. We all have our breaking points. Determine to what level you can endure risk and don’t go for anything beyond that point. The risk threat out there in the world of stock investment is real and it will only help you to know your own limits and stick with those.

  5. Discover Your Own Investment Style
    The big question here is, who are you? What is your style? Obviously, not every investment style will suit you. Discover and stick to your niche. Be yourself! If you are conservative, invest a better part of your money in low risk/revenue investment type. If your are the daring type, then you can go for the high risk/return investment. Stock investing is nothing extraordinary where you should forget your preferences, style and other senses.

  6. Count the Costs
    It is very important to know the cost of investing in a particular company, as some costs could eat deep into your investment capital. Investing in stocks, business, real estate and others can be far riskier than some can bear. For investors starting small, a discount broker would be the best option. Bigger investors could try mutual funds, since mutual funds involve some service charges not included by the discount broker.

  7. Get an Excellent Investment Advisor
    Getting a financial advisor is a big decision. Financial advisors are there to give you invaluable professional ideas, which will help you progress. Some of the factors to consider when deciding on getting an investment advisor are: past records of performance, reputation, service fees and so on.

  8. Choose Your Investment
    This will largely depend on who you are, that is, your personality. The major factors to consider here include asset allocation and diversification. In both cases you are trying to balance risk/revenue ratio by distributing your investment among the different classes of investment in order to avoid putting all your eggs in one basket. The cliché of all stock investors right here. Investment newsletters can help you identify trade opportunities that will work for you.

  9. Put Your Emotions on the Leash
    In investing, the two most dangerous emotions you have to deal with are fear and greed. While fear makes an investor sell his position too early, greed will make him hold on to his position for too long. To make a success of your investment venture, you must exercise the golden medium, find balance and temperance in everything, especially your emotions. Stock investing is the field where you should remain sober and clear-headed at all times.

  10. Regularly Make an Inventory of Your Investment and Effect Necessary Changes
    You must always be ready to review your current positions and make necessary adjustments. Do not throw caution to the wind, do not leave your stocks hanging. Always keep an eye on your current standings not to make mistakes or let opportunities slip.

Stock investment is a funky sphere for rookies. It all sounds very exciting and you are intrigued by the possible outcomes. And in the light of such expectations you might skip the part, where you are supposed to do your research, learn, calculate and then jump. In that case, as long as you are following these steps to learn the what, when and how’s of the sphere, you are good to start investing.

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