In short, stocks are a representation of ownership in a business.
It generally takes a ton of stock to have any significant ownership or control in any business - but ownership is what it represents. Owning a share of stock in a company means that you have a valid interest in the company and a legitimate claim to a portion of the company's holdings or profits.
Any company that is openly traded on the various stock exchanges can be purchased (at least partially) through stocks. Some cost more per share than others and some are much more stable than others. It's not correct to purchase stocks simply because you like a company's products. Some companies produce excellent products but the companies themselves may not be doing so well, even though you may think that companies that produce great products should be doing great as well.
The correct approach should be to first look at the fundamentals of the company. This is a method of security valuation known as fundamental analysis which involves examining the company's financials and operations, especially sales, earnings, growth potential, assets, debt, management, products, and competition. Fundamental analysis takes into consideration only those variables that are directly related to the company itself. The more you can dig up about the company the better. I can't stress how important this step is if you intend to invest long term in a company.
If you are planning a short term investment, then you must study the short term trends of the market, the direct industry in relation to the company and the company itself. This form of study is known as technical analysis and there are many forms of studies available to this method of analysis, usually involving the study of charts and signs derived through the charts.
As mentioned earlier, when purchasing stocks for the purpose of profits you need to see the big picture. It should not be an emotional decision based on whether you like the company and its products or not.
This should purely be a financial decision - one that can make you money or cost you money.
Besides fundamental analysis and technical analysis, there are a few factors you should look at when selecting what stocks to buy:
Company History
How does the company treat its employees? Have there been strikes or complaints of staff mistreatment? How has the company been doing? Has it shown exceptional performance? Has it experienced bad times? If so, did it survive the stormy weather and come out aces? You really want to invest in a company that has a positive history and has as little blemish as possible.
Current Performance of the CompanyThere is a saying - what's past is past. While this is not entirely true whilst studying a company, you also don't want to focus entirely on what's history. The current performance of a company is a strong indicator of what's going to happen to it's stocks in the future - which is what you are going to be most interested in. If the company has a strong management team and is doing a great job at present, chances are its stocks will be a worthwhile consideration for an investment. If the company has a glorious history but for some reason is not doing well currently, you may want to dig further to see if the management has changed and they are not as experienced as their predecessors, or if this is a temporary market setback which is affecting a lot of companies in the same industry. Whatever the case, this could be a bad choice for an investment and I would suggest you keep clear of this stock unless you are confident that its situation would improve.
Forecasts and Projections
Sometimes you can judge how well a company's stocks would do by studying how often it meets the forecasts and key performance indicators it sets for itself in the past. While this is speculative by nature, it does show whether the management of the company is good at setting realistic goals for themselves and achieving them. Such companies exhibit matured management capabilities and their stocks are usually sound investments. Ultimately, you should feel good about the financial future of a company before deciding to invest in its stocks.
In conclusion, there are many reasons to purchase a stock - but you should focus only on non-emotional reasons if your sole purpose is to make a return. Good luck with your investment!
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Article Source: http://EzineArticles.com/?expert=Richard_T._Tyler
1 comments:
To explain in a simple way, layman's language, a stock is the share in the ownership of a company. You may dream of owning a huge company and becoming rich. Although you may not be able to own the whole company, you can purchase a certain percentage of its stock and become its proud owner to that extent. The process can be mathematically explained. Suppose you start a company and issue five shares. Obviously each share would be equal to 20% or one-fifth of the ownership of the company. If, however, you buy another share besides the one you already have, you have two shares and your ownership or stake in the company would rise to 40%. The words stock, equity and share are synonymous to each other. After buying the stock of the company, you can stay with the company as long as it continues paying you dividends and leave it the moment you face losses.
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