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Investing in the Stock Market: Numerous innovations in the financial services industry allow us to better manage our money, thereby giving us more freedom to plan our future and set aside some funds in case of certain needs or emergencies that may come up in the future. Beyond the basics of financial literacy? —? which is to ensure that you have a bank account and you set aside some savings? —? investing is a crucial financial service that you may want to consider for yourself. It is different from savings for several reasons? —? first, you can take money out of your savings immediately and anytime you need to, while with investments you are putting your money into an asset that you believe has a good probability of generating a safe and acceptable rate of return over time. This can span over several years. Investing is important because it helps you build and create wealth over time: It is the line that separates financial literacy from financial freedom. With this in mind, we would recommend you start out investing with stocks. This article is intended to make the stock market for beginners a less daunting venture, starting with the basics of what a stock is and moving to how you can invest in the market. What is a stock? A share of stock represents legal ownership in a business. For the purpose of this article, the focus of owning stock is allows you to share in the dividends of the business whenever they are distributed. However, owning shares can also give you the right to vote in shareholder meetings, as well as the right to sell your shares to someone else. We’ll discuss learning to trade stocks in the next article. There are two main types of stocks you can go for: common stocks and preferred stocks. Common stocks: are what people usually refer to when they talk about investing. Here, you are entitled to a share of the company’s profit or losses, in proportion to how much you have invested in. Preferred stocks: mean shareholders receive specific dividends at predetermined times. Some preferred stocks can be converted into common stocks. Investors in preferred stocks get paid before investors in common stocks, and if the company goes bankrupt, the preferred stockholders outrank common stockholders in terms of recovering their investments from any sales or recoveries made by the bankruptcy trustee.
How do I make money from investing in stocks? The stock market for beginners can be intimidating, but the potential profits can be broken down to make it easier to understand. There are three factors that influence the future value of a stock. First, the initial dividend yield on cost. Next is the growth in intrinsic value per share, and last is the change in the valuation applied to the firm’s earnings or other assets, measured by the price- to-earnings ratio. As an investor, you can collect cash dividends, share in the proportional growth of the underlying earnings per share, and receive a certain amount for every dollar in profit that a company generates. This is based on the overall level of panic or optimism in the economy, which drives the price-to- earnings ratio. Understanding how your profit or losses are structured when you buy a stock can help significantly in enhancing your financial literacy, because it boosts your predictions and decision-making skills. Whenever you are considering investing in a business through a share of stock, you can divide your projections for that company along the abovementioned components and better see how far your investment will go. Once you have the basics of investing in stocks, you can take your financial literacy to the next level by learning to trade them. This is different from investing in stocks because it is more short term, as you are buying and selling stocks for a quick profit.