Financially Fit & Fabulous: Understanding the Stock Market
INVESTING in the stock market is an exciting way to reach your investment goals as you can enjoy the financial success of your favourite companies right along with them. While the intricacies of stock market investing can get complicated, the basic structure and function of stocks and the stock market is relatively straightforward.
Here are few key things to know.
There are two main types of stock, common and preferred stocks. Common stock is the most commonly traded and offers investors the greatest potential for price gains. If you buy a share of common stock, you own a portion of the company. When the company generates profits, more investors tend to buy shares, driving the price up. If you own a stock that increases in value from $50 per share to $60 per share, you’ve gained 20 percent on your investment.
Preferred stock is a different type of stock that has different characteristics than common stock. While a share of common stock may pay a small dividend, it is more appropriate for an investor seeking share price gains rather than income. Preferred stock is just the opposite, typically paying a much higher dividend but generating much smaller price movements. This can work both ways for investors: If the stock market goes down, common shares will fall more dramatically than preferred shares. However, the opposite is also true. When the market roars higher, common stock will typically generate much higher capital gains than preferred stock.
Buying & Selling Stock:
The stock market is driven by supply and demand. If more investors demand to own stocks, the market rises. If there are more sellers than buyers, the market falls. Demand is created by a combination of factors, but the primary drivers are company profits and the state of the markets in general. While there isn’t a perfect correlation, typically more profitable companies attract more buyers. Even when a company is doing well, however, investors can decide to sell due to rising interest rates, global unrest, declining prospects for the general economy and actions by government and monetary policy officials, such as the Federal Reserve Board.
Investment Stock:
While the short-term movements of the market are unpredictable, the long-term trend is typically up. The longer you hold your investment in the stock market, the more likely you are to make money, at least based on historical trends. The value of your stock is ultimately tied to the fortunes of the company in which you invest. Just because the stock market as a whole rises doesn’t mean the value of your stock will rise as well.
Since investing can be complicated for beginners, consider consulting a financial adviser before you make your first investments. A good adviser can provide you with lots of information you might not be able to access on your own.
Before you make investment choices in stocks or otherwise, we recommended you employ the four key guiding principles we have shared in earlier articles. Invest early, invest regularly, stay invested and diversify. These are the four key pillars to successful investing, across all asset classes, including stocks.
It is also so much easier to put the principles of investing into action when you have professional support. Your Investment Advisor at Scotia Investments will guide you through a thorough discussion and help you to develop a portfolio to meet your goals, and not just recommend a stock pick.
If you have any questions about the information contained in this article, or you wish to talk about how to start investing in you, please contact an Investment Advisor at Scotia Investments at the branch location closest to you or visit our website at scotiainvestmentsjm.com
Odeon Wilmot is a licensed Investment Advisor from Scotia Investments Jamaica Limited.
