Stocks can provide opportunities for investors to increase wealth. But do you know how stocks work and how they go about making you money? While there are no guarantees when it comes to individual stocks, the following information can help you better understand the basics and become a smarter investor.
Protective Life Insurance Company does not recommend or endorse any particular investment option, and does not provide investment advice. Neither Protective Life nor its representatives offer legal or tax advice. Purchasers should consult their financial advisor, attorney or tax advisor as needed regarding their individual situation.
What's a stock?A stock is a share in the ownership of a company. When you become a stockholder, you are essentially one of many owners of a company and eligible for an individual share of the company's earnings. The more stock you acquire, the greater your share of ownership in the company becomes.
How are stocks issued?When you purchase shares of stocks, you receive a stock certificate, which is your proof of ownership. Stock certificates used to be issued as paper documents, but today's stocks are held electronically at a brokerage. Before, when you wanted to sell your shares, you had to physically take them to the brokerage firm. Today, trading can be done electronically, enabling a paperless transaction.
How do you make money with stocks?
Being a shareholder makes you entitled to a portion of the company's profits. So, theoretically, when the company makes money, you can make money. And the more shares you own, the larger portion of the profits you can receive. Profits are sometimes paid out in the form of dividends and are taxable.
It's also possible to buy a stock, hold it for a period of time, and then sell it for a higher price. In this instance you'll receive a payment for the sale of the stock in the form of a capital gain, which is also a taxable event.
How do you track the market?
If you're looking to track the stock market and see how it is performing, there are many different sources available.
The most noteworthy indicator is the Dow Jones Industrial Average (DJIA) that weighs and tracks 30 of the largest and most influential public companies in the stock market. So when you hear that the “markets are up,” most investors are quoting the DJIA (commonly referred to as the Dow).
The Standard & Poor's 500 (S&P 500) is an index based on the stock prices of 500 leading companies in leading industries of the U.S. economy. It differs from the Dow in that it doesn't cover the biggest companies, but the companies that are widely held and followed.
The National Association of Securities Dealers Automated Quotations (NASDAQ) covers more than 5,000 companies that are traded on the NASDAQ. While it includes a variety of industries, its concentration has primarily been technology, telecom, and Internet industries.
Learn the basics
The stock market can provide opportunities for investors to increase their wealth. But to the novice investor, the inner workings of the stock market can be confusing and something that only those with a degree in finance can understand. Fortunately, by learning a few basics about how stocks work you can have the confidence to make wiser investments worthy of even the savviest investors.
For more information on money management, visit our learning center.