Stocks are partial ownership papers to a public company. A private company is one where the owner owns 100% of the company. A public company is one where the owners decide to issue stocks of partial ownership so for a price the general public can offer money for the stock and buy part of a company.
Types Of Companies
The controlling owner is usually the person who started the company or someone who bought the company. When a company goes public the company is divided into shares (representing a portion of ownership). The shares are called stocks which are put up for sale. There are three main owners of stock: the controlling owner, the individual stock purchaser, and the mutual fund managers.
A mutual fund is a group of shares from different companies which are purchased individually by mutual fund managers. The managers then issues shares which represents ownership of more than one company. see the example below:
Individuals Purchase of Mutual Funds Broken Down
ETFs are Exchange Traded Funds. These are mutual funds that are traded like stocks on the stock market. (Mutual funds are not traded on an exchange but are purchased from a fund company.) *This is outside the scope of this post but, I wanted to let the beginner know ETFs are another term they may hear.
The individual investor has three main choices to purchase a company. They can buy the individual stock directly or via a broker, groups of stocks via a mutual fund (for this I also include ETFs under mutual funds), or purchase a company from a private owner. The purchase from a private owner is out of most people's reach so we'll look at the first two options.
Individual Stocks
If stocks are bought "directly" they are usually through an administrator. This is an accounting company who issues the stocks on behalf of the company who's stock is for sale. The advantages are you can buy partial shares, you have more control over which companies you buy, and you can see the fees up front.
The costs involved with this way of acquiring a company may be purchasing fees, selling fees, and administrative. These fees are stated in the prospectus. The risk is higher with individual stocks. If a company goes out of business; you are out of your money.
Stocks purchased from a broker usually have additional fees (they may be hidden) associated with trading. The use of full service brokers are expensive and you can use a discount broker if you know what stock you want to purchase. I don't use full service brokers because I can't justify the costs. It seems like paying to go to a restaurant when all you want to do is just eat and you can go home and make something cheaper at home.
Stocks purchased from a broker usually have additional fees (they may be hidden) associated with trading. The use of full service brokers are expensive and you can use a discount broker if you know what stock you want to purchase. I don't use full service brokers because I can't justify the costs. It seems like paying to go to a restaurant when all you want to do is just eat and you can go home and make something cheaper at home.
Grouping Stocks (Mutual Funds and ETFs)
Stocks can be purchased as a group. These are purchased through a mutual fund company (Mutual Fund) or via a broker on the stock exchange (Exchange Traded Fund). The fees of the mutual fund are generally more expensive then the ETF, however I tend to invest in index funds when I buy mutual funds and the fees are minimal.
One index fund I use is the Standard and Poors S&P 500. Standard and Poors rate financial stability of stocks, governments, businesses, etc. The S&P 500 is their list of the top 500 large companies in the USA. John C. Bogle did a thesis while he was at Princeton University which found 3/4 of mutual funds at the time could not beat the purchase of all of the stocks in the S&P 500 list. This is why I look for the lowest cost way to buy an index fund. Most mutual fund companies offer a S&P 500 fund. The fees are lower because they don't have to pick any stocks. The lower fees means you have more money to invest.
Where to Start Steps:
Stocks can be purchased as a group. These are purchased through a mutual fund company (Mutual Fund) or via a broker on the stock exchange (Exchange Traded Fund). The fees of the mutual fund are generally more expensive then the ETF, however I tend to invest in index funds when I buy mutual funds and the fees are minimal.
One index fund I use is the Standard and Poors S&P 500. Standard and Poors rate financial stability of stocks, governments, businesses, etc. The S&P 500 is their list of the top 500 large companies in the USA. John C. Bogle did a thesis while he was at Princeton University which found 3/4 of mutual funds at the time could not beat the purchase of all of the stocks in the S&P 500 list. This is why I look for the lowest cost way to buy an index fund. Most mutual fund companies offer a S&P 500 fund. The fees are lower because they don't have to pick any stocks. The lower fees means you have more money to invest.
Where to Start Steps:
- Budget money to invest (savings)
- Have low or no debt (otherwise it is like investing with borrowed money; like people did during the Great Depression)
- Have an emergency fund before you invest (nothing is worse then selling stocks during a temporary dip to cover a emergency)
- Is there a 401k available to you at work? (Invest to the company match at least to not leave money on the table and get a tax deferred way to invest.)
- Invest in a low cost index fund through a discount broker with low fees
- Don't buy through a bank, insurance company, etc
- Buy through a mutual fund company or discount broker
- Check any fees or costs involved
- Invest in individual stocks via a direct purchase plan with low or no fees and a DRIP available
- Be wary of costs of purchase, sale, trade and administrative for the direct purchase If there is a high sales cost, look to see if the stocks can be moved to a discount trader like Scottrade and save costs.
- Look for No-Load DRIPs
- It can be simple and it is; if someone offers you a investment and you don't understand the terms pass on that investment.
Start small and build momentum and stocks can be a investment in your future.
Notes:
* Unit Trust can be used for Mutual Fund if you are from the UK, the Unit Trust serves the same function in the UK.
*This article to expose people to stock investing and everyone's financial situation is different (this article is not advise) so check with qualified professional people who know about stocks so you can make the right decisions for your money.
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