02:07
Future
A share of stock is a representation of ownership in a particular firm. For example, if a corporation (we'll call it Company A) decides to issue 100 shares of common stock and you purchase 5 shares, you now own 5% of that company. Common stockholders usually have voting rights on various issues, such as selecting the CEO and Board of Directors (the managers who run the company for the shareholders). Voting rights are in proportion to ownership, so to continue our example if you owned 5 out of the 100 shares of Company A, your vote would be worth 5% of all the votes cast.
Shareholders can also receive dividends. A dividend is when a company has earned a profit by conducting business, and decides to distribute those profits to the owners of the company (Dividends can also be issued as additional shares of stock instead of cash). Receipt of dividends is also proportionate with ownership percentage. So if Company A decides to issue $100,000 worth of dividends to its shareholders, you would receive 5% of that, or $5,000. However, dividends are not guaranteed to holders of common stock because the managers of the firm can decide to retain the earnings in order to reinvest in the company, in hopes of additional future growth.
In addition to earning money as an investor through dividends, you can also earn money through capital gains. Let's say you purchased 5 shares of stock in Company A for $10 per share, and a few years later sell your shares for $50 each. You've realized a capital gain of $40 per share, and you will be taxed on this income based on the current capital gains tax rate (It is also a risk that you will experience a capital loss, for example buying at $10 per share and later selling at $6 per share).
As with all investing, in order to earn a return you have to take risk. Investing in the stock market is no guarantee that you will make money. In fact a lot of people have lost money by investing in stocks. One of the most important things to remember is that you should NEVER invest your money in something that you don't understand. So don't run out and buy shares in Disney just because someone tells you its a good idea. However, lots of people have made a lot of money by investing in the stock market, and if you do it right it can be a great way to save for retirement.
Next, you might want to look around and talk to a few Financial Advisors. Make sure that you only work with someone who will be patient, and willing to explain things to you in a humble way. Don't ever pay someone to act smart and make all of your decisions for you.
One great way to build a diversified portfolio is to invest in indexed funds instead of single stocks. An example of this would be an Exchange Traded Fund that tracks the S&P 500. The S&P 500 is a very popular index, and many consider it to be one of the most dependable indicators of the state of our economy. It is a value-weighted index which follows the 500 largest publicly traded companies in the US. Companies like Apple, Microsoft, Home Depot, and McDonald's are all included in the S&P 500. By investing in an ETF tracking the S&P 500 you've taken a very easy, yet very effective way to diversify and hedge against company-specific risk.
Another thing to remember is to think long-term when investing, especially in the stock market. A good idea would be to set up a Roth IRA (Individual Retirement Account) which allows you to make after-tax contributions. This means that you pay taxes on your income before making your investments, and then your portfolio can grow tax free. When you retire, you won't pay any taxes on the money you pull out of your Roth IRA. Again, to do this you should find a good Financial Advisor in your area.
You asked about Mutual Funds: A Mutual Fund is an organization that pools the funds of a large group of investors and then uses that capital to invest in various securities, such as stocks, bonds, or even real estate. Most Mutual Funds are not traded on an exchange like shares of a publicly traded firm or like an ETF. Rather shares are purchased and redeemed directly from the Mutual Fund organization itself. There are some fees relating to Mutual Funds such as operating and load expenses, which can be viewed before buying into a Mutual Fund. It is easy to search around websites like Yahoo Finance or others to review how Mutual Funds have performed since their inception. My advice would be to pick a Fund that passively tracks an index, because studies have shows that these funds outperform those that try to actively manage the portfolio through constant trading.
I hope that helps! Let me know if you have more questions.
Shareholders can also receive dividends. A dividend is when a company has earned a profit by conducting business, and decides to distribute those profits to the owners of the company (Dividends can also be issued as additional shares of stock instead of cash). Receipt of dividends is also proportionate with ownership percentage. So if Company A decides to issue $100,000 worth of dividends to its shareholders, you would receive 5% of that, or $5,000. However, dividends are not guaranteed to holders of common stock because the managers of the firm can decide to retain the earnings in order to reinvest in the company, in hopes of additional future growth.
In addition to earning money as an investor through dividends, you can also earn money through capital gains. Let's say you purchased 5 shares of stock in Company A for $10 per share, and a few years later sell your shares for $50 each. You've realized a capital gain of $40 per share, and you will be taxed on this income based on the current capital gains tax rate (It is also a risk that you will experience a capital loss, for example buying at $10 per share and later selling at $6 per share).
As with all investing, in order to earn a return you have to take risk. Investing in the stock market is no guarantee that you will make money. In fact a lot of people have lost money by investing in stocks. One of the most important things to remember is that you should NEVER invest your money in something that you don't understand. So don't run out and buy shares in Disney just because someone tells you its a good idea. However, lots of people have made a lot of money by investing in the stock market, and if you do it right it can be a great way to save for retirement.
Next, you might want to look around and talk to a few Financial Advisors. Make sure that you only work with someone who will be patient, and willing to explain things to you in a humble way. Don't ever pay someone to act smart and make all of your decisions for you.
One great way to build a diversified portfolio is to invest in indexed funds instead of single stocks. An example of this would be an Exchange Traded Fund that tracks the S&P 500. The S&P 500 is a very popular index, and many consider it to be one of the most dependable indicators of the state of our economy. It is a value-weighted index which follows the 500 largest publicly traded companies in the US. Companies like Apple, Microsoft, Home Depot, and McDonald's are all included in the S&P 500. By investing in an ETF tracking the S&P 500 you've taken a very easy, yet very effective way to diversify and hedge against company-specific risk.
Another thing to remember is to think long-term when investing, especially in the stock market. A good idea would be to set up a Roth IRA (Individual Retirement Account) which allows you to make after-tax contributions. This means that you pay taxes on your income before making your investments, and then your portfolio can grow tax free. When you retire, you won't pay any taxes on the money you pull out of your Roth IRA. Again, to do this you should find a good Financial Advisor in your area.
You asked about Mutual Funds: A Mutual Fund is an organization that pools the funds of a large group of investors and then uses that capital to invest in various securities, such as stocks, bonds, or even real estate. Most Mutual Funds are not traded on an exchange like shares of a publicly traded firm or like an ETF. Rather shares are purchased and redeemed directly from the Mutual Fund organization itself. There are some fees relating to Mutual Funds such as operating and load expenses, which can be viewed before buying into a Mutual Fund. It is easy to search around websites like Yahoo Finance or others to review how Mutual Funds have performed since their inception. My advice would be to pick a Fund that passively tracks an index, because studies have shows that these funds outperform those that try to actively manage the portfolio through constant trading.
I hope that helps! Let me know if you have more questions.
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