Stock investing is a popular tool that is used by many
people to create wealth. Anyone from teenagers to retirees can own stock and
many of them do. You can never be too old or too young to be an investor but
the faster you start the better off you will most likely be.
Defining Stock
A stock is a share in the ownership of a company. You are a
partial owner of the company by owning stock in a company and thus you have a
claim on the company's assets and voting rights in company matters. Stocks are
also referred to as equity since they signify a share of ownership.
Unlike bonds, stocks do not guarantee a definite return on
your investment, and you can even lose some or your whole principal amount.
However, this greater risk implies that stocks must perform better to
compensate for the higher risk.
Returns on Stock Investment
Return on investment for stocks come in two forms:
Capital Gains
Capital gains are the gains realized from the sale of
capital assets. Growth of capital gains comes when the price of the stock you
buy increases above the purchase price, so the value of your investment has
increased.
But, until you sell the stock this value cannot be realized, at
which point you must pay taxes on the gains.
Dividends
The other forms of return on stocks are dividends, the amount
distributed out of a company's profits to its shareholders in proportion to the
number of shares they hold. Dividends may be from interest, capital gains, or a
return of capital.
Market Types
Especially, there are two classic market types used to
characterize the general direction of the market, which include:
- Bull
markets are the markets where prices on stocks are on the overall rise,
typically the result of a strong economy. A bull market is characterized
by generally rising stock prices, high economic growth, and strong
investor confidence in the economy.
- Bear
markets are the opposite. A bear market is characterized by falling stock
prices, bad economic news, and low investor confidence in the economy.
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