Stocks represent your ownership in a company. When you buy a company’s stock, you become a stockholder or part-owner of that company. Stocks are valued according to the performance of the company. So, if a company is doing well, the value of the stock will go up, and vice versa.
You earn money from stocks in two ways:
– You can buy stocks when they are at a low price and sell them when the price increases.
– You can also get money via dividends that some companies offer to stockholders (a dividend is a quarterly (or sometimes annual) payment to you from the company – this payment is calculated as a percentage of the stock value).
While there is always an element of risk when buying stocks, you can always reduce the risk you take on by not putting all your eggs in one basket – by this, we mean, you shouldn’t just invest all your money in a single company or entity. Instead, spread it across companies from different sectors. This is called diversification and can help lower losses.
Stocks are of three types: single stocks, exchange-traded stocks (ETFs), and mutual funds.
Single stocks: With single stocks, you are investing in one company and your investment will grow depending on the performance of that company. But there is a fairly large risk here in tying down your money to the fortunes of a single company.
Exchange-traded funds (ETFs): These are funds that contain stocks from different companies, but get traded in the exchange like a single stock. They usually match returns of a market index like Dow Jones or S&P 500 since you are only investing in stocks that are included in an index. This means an ETF’s performance will match that of the stock market. Although ETFs have lower fees than mutual funds, there are other expenses you have to meet like operation fees and transaction fees, that can take out a part of your returns if you are charged on these counts every month you invest.
Mutual funds: Mutual funds are created when several investors pool their money together and a fund manager uses this capital to buy stocks of several companies. This automatically diversifies your portfolio.
