Investing in stocks

Buying shares in a company can be a very lucrative and interesting deal. As a shareholder, you will own a stake in the company you have invested in, and you will have the right to vote to support or criticize the directors' decisions. If the company does well, you should receive income in the form of dividend payments. And over time, there is the potential for further profits from the growth in the value of the shares. Here's what you need to know about investing in shares.

What is a share

A share is simply proof of ownership of a portion of a company. The more shares you own, the more of the company you own, and you become a shareholder. This proof of ownership is represented by a share certificate.

As a shareholder, you have access to your share of the company's profits and any voting rights that come with the shares. It is important to note that being a shareholder does not necessarily mean you have a say in the day-to-day management of the business. Companies sell shares to raise money to grow and expand their businesses, as well as to pursue specific projects to generate more income. These companies can sell shares both publicly and privately, and you can buy different types of shares.

Types of Stocks to Invest in

Common Stocks

Buying common stock makes you a part owner of the company. If the company has met all of its other obligations and has decided to distribute some of those profits to shareholders, you will be entitled to a share of the company's profits.

Most common shares are voting shares, meaning you have a say in matters affecting the company, such as director remuneration or agreeing to a takeover.

The risk with common shares is that you are not guaranteed to receive any share of the profits, and if the company goes bankrupt, you will be the last in line to get your investment back.

Preferred Shares

These shares do not have voting rights, but as the name suggests, they do give you other rights. Preferred shareholders typically receive a share of profits before common shareholders, usually in a limited amount determined by the issuing company.

In addition, although preferred shareholders are last in line for any payouts, they receive some money before common shareholders if the company goes bankrupt. Preferred shares are generally considered to be less risky, and therefore their payouts are typically lower than common shares.

What is the Return on Investing in Stocks?

Capital Growth?

Capital growth is the difference between the amount you paid for your share and its current value. You can determine whether you have made a profit or loss on your investment by subtracting the price you paid for your share from the sale price you sold it for. When you buy a stock, you only make a profit when you sell the stock at a higher selling price.

You can also calculate the percentage yield on your stock by dividing the profit or loss you made when you sold your stock by the original price you bought it for.

Dividends

Dividends are how a company rewards or pays out some of its profits to shareholders/investors. It is important to note that not all companies pay dividends, even if they are profitable. Companies pay dividends once or twice a year after annual or interim results. The company's board of directors decides whether to pay dividends to shareholders and how much to pay in dividends.

Despite the obvious desire to receive more dividends, smart investors often prefer to see this ratio at less than 70%, as they know that the profits are being put back into the business. Often, when a company is in a growth phase, the dividend payout may drop to zero in order to use the available cash flow to fund projects.

Dividend Yield

The dividend yield is the percentage of net income paid out as cash dividends to shareholders. A company makes its dividend yield decision based on its preferences, which are to either distribute income as cash dividends or reinvest income back into the company to generate additional income.

The dividend yield can be very important to you when considering buying a stock. A high dividend yield does not necessarily mean that the value of your stock is being maximized, as companies that retain their profits and pay low or no dividends can use these reserved profits to grow and build the company and therefore increase your investment, which means capital appreciation. The ideal situation is to own a stock that gives you both income and good capital gains.

What Affects Price

Over shorter periods of time (weeks or months), the value of a particular stock can fluctuate based on factors that are much broader than the actual performance of the company.

For example, if investors believe a company may be in for tough times -- perhaps because a competitor is releasing a new product or because the company isn't growing as fast as everyone expected -- the stock price may fall. On the other hand, potentially good news about a company could push the stock higher -- even if nothing has actually changed.

And of course, the overall performance of the economy and markets will also affect the stock price.

Over the long term, however, the main determinant of a stock's performance is how successful the company has been.

How to Choose

There are several ways to classify stocks:

Growth vs. Value

Companies typically fall into one of two categories based on how they make money for their investors:

• Growth companies, these are in an expansion phase. Any money they have will likely be used to expand their business or develop new products and services. As they grow, their stock price increases.
• Companies whose value is relatively stable. These companies are more likely to pay dividends.

Market Cap

Companies can also be divided based on the overall value of their stocks - their "market cap". This can be large, mid, or small. The boundaries between one group and the next are not rigid, and they change as the overall market value changes. In general, large-cap stocks make up about 65%-75% of the overall market, while mid- and small-cap stocks make up about 10%-15% each.

Large-cap stocks tend to be more stable than smaller stocks. But smaller companies may have more potential for growth.

Sectors

Companies can also be grouped into sectors. As with market capitalization, there are several different systems for classifying sectors. Most systems include categories such as technology, healthcare, and energy.

Stocks in certain sectors will tend to react predictably to economic conditions, so it is important to make sure that your investments are not overly concentrated in certain sectors unless you are doing so intentionally as part of your investment plan.

For example, when the economy is bad, sectors such as information technology, consumer staples, and telecommunications services may suffer as people may decide to spend less in these areas.

On the other hand, people will need to continue to spend money on things like basic goods, utilities, and healthcare, so these sectors may suffer less or even grow.

It is also important to note that good or bad news about a company’s stock may affect other companies in the sector to some extent.

The Benefits and Risks of Investing in Stocks

Any investment in stocks should be viewed as a long-term investment with investment horizon of 7 years or more, as a longer investment horizon can reduce potential risks.

There is no guaranteed return on investment, and there is even a possibility of capital loss, since stock prices can rise (capital gain) or fall (capital loss).

Advantages

• Inflation hedging - investing in stocks provides a hedge against inflation (based on historical returns).
• Liquid investments - shares can be traded and converted into cash.
• Capital gains from investing in shares are tax-free for individuals in some countries.
• Shareholders receive income from dividend payments.

Risks

• The movement of a share price (up or down) is influenced by various factors, including but not limited to the company's performance, economic conditions, investor perceptions, market expectations, etc.
• There is a risk that the company may underperform and the return on investment may not be as high as investors expected.