Introduction to Stocks
Let's talk stocks. While you may not necessarily invest in individual shares in your retirement plan (though in some cases you
can), they still form the foundation of many of the types of mutual funds that you may own. So even if you never plan to invest in a
single share in your life, you will still want to understand the way they work because you will likely invest in mutual funds
at some point.
A single share of stock is quite simply a (very small) portion of ownership in a company. By being a partial owner of a company you have
a claim on the company's assets and earnings. So, when the company does well you reap the benefit in the form of dividends and/or
capital appreciation. Conversely, when the company does poorly or when Wall Street looks poorly upon the company for some reason, you
bear the brunt of the downside; usually when the value of the share decreases. Thus stocks tend to carry a lot of risk.
Let's investigate stocks in a little more detail:
There are two major types of stocks that you can purchase. While fundamentally they are the same, they have some very distinct differences.
Learn about the difference between common stock and preferred stock.
Generally, there are two ways to earn money by purchasing and holding stocks. Learn about dividends
and capital appreciation.
Furthermore, it's important to understand that stocks can be divided up and categorized by other elements such as market capitalization,
sector, and growth style.
Finally, let's discover the different types of risk that you take on when investing in different types of securities in the market. There's
probably more types of risk than you realize, and they cover everything from stocks to money market investments.
Fun tool:
I do NOT endorse rapid-fire stock trading in retirement accounts (or period, for that matter). While owning individual stocks can be an integral
part of your overall investment strategy, the reality is that investing in individual stocks assumes more investment risk than should be tolerated
for retirement purposes. However, this doesn't mean that you can't learn how to trade stocks in a fun and safe environment before using your own real money. I recommend using the
stocks trading simulator at Investopedia.com. I use it. And best of all, it's free! Have fun!
Check out a new site I've found that has a great deal of in depth information about stocks.
