What are stocks?
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Investing in stocks, or buying shares, is a way to grow your savings through investments. It involves purchasing ownership in companies; which offers potential profits as well as the power to vote on key company decisions. On this page you’ll learn about what stocks are, different types of stocks, and what to consider before buying stocks. This guide will help you decide whether investing in stocks is the right choice for you.
A stock, also known as a share, is a type of security that represents partial ownership in a company, making you a stakeholder in the business
Companies offer their shares on the stock market to raise capital for business expansion
The value or price of a company’s shares in the stock market is determined by the principles of supply and demand
What is the definition of stocks?
In simple terms, stocks are securities or financial assets with monetary value that represent ownership shares in a company. Companies typically issue shares of stock to raise funds to grow and develop their business.
From an investor’s perspective, buying stocks provides an opportunity to grow wealth and, potentially, beat inflation, based on the performance of the company in which you invest.
What are the different types of stocks?
Two primary types of stocks exist: common and preferred. Common stocks are traded on the stock exchange and grant investors voting rights within the company. Preferred stocks, on the other hand, offers faster dividend payouts but does not lend voting privileges.
Other types of stocks include large-cap, mid-cap, and small-cap stocks. Large-cap stocks represent well-established, large companies; mid-cap stocks are from medium-sized firms, and small-cap stocks are associated with smaller companies, often with higher growth potential and risk.
Stocks are also categorised based on company characteristics or industry sectors:
Basic materials: Companies involved in natural resource utilisation
Conglomerates: Global firms with diverse industry interests
Consumer goods: Companies offering retail products to the public
Financial: Includes banks, insurance, and real estate entities
Healthcare: Involving healthcare providers, insurers, medical equipment, and pharmaceutical companies
Industrial goods: Focused on manufacturing and production
Technology: Covering computer, software, and telecommunications businesses
Utilities: Including electricity, water, and gas service providers
How do stocks work?
<wbr><wbr>Stocks work by granting you a share of ownership in a company. The value of stocks fluctuates based on company's success. Stock exchanges are created when publicly listed companies are bought and sold. A stock exchange is essentially a marketplace where stocks are traded. Traders and stockbrokers buy and sell financial instruments like stocks, bonds, debentures, etc.
Companies sell shares of stocks to raise capital for growth, often through an initial public offering (IPO), where you can acquire shares for resale on the stock market. Stock prices are influenced by supply and demand; more sellers lower prices, while more buyers raise them. Profits result from a growing company, leading to higher stock prices. However, it comes with risk, as poor company performance can cause share prices to drop or lose value.
Another path to profit is through dividends, typically paid quarterly on a per-share basis from company earnings.
What are the pros and cons of buying stocks?
Pros | Cons |
|---|---|
Purchasing stocks potentially allows you to earn strong returns if you invest in the long-term. | Returns are not guaranteed, and you could lose some of the value of your investment, or your total investment, if the company you own shares fails. |
It’s not too hard to get into stocks, as long as you know how the stock market works, and you’re good at analysing data. | You’ll need to invest a lot of time if you purchase stocks, because the most successful investments are typically long-term, rather than earning quick profits. |
There are plenty of stocks to choose from, which means if there’s more than one company you want to invest in, you can diversify your portfolio. | The stock market is volatile, which means you can never predict how well your investments will perform. |
You don’t need a huge lump sum to start investing in stocks. | If you choose to invest in one individual company, there’s a chance you might lose all the value of your investment because you don’t have other stocks to make up for the loss. |
It’s possible to stay ahead of inflation, depending on your investment strategy. |
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How to know which stocks to buy
Before investing in the stock market, it's crucial to study a company’s growth trends and performance history.
It’s also recommended to examine the company’s dividend payments. While high dividends may seem appealing, a sudden increase may indicate investor desperation. Lastly, assess the company’s long-term stability.
Stock markets can be volatile, so evaluating at least a 10-year performance history can help predict the company’s future prospects over the next five to ten years.
To know what stocks to invest in, consider the following:
Define your investment goals and risk tolerance
Research companies and industries
Look for strong fundamentals, like growth and management
Diversify your portfolio
Consider financial ratios and dividend yields
Analyse historical performance
Stay informed about market conditions and expert opinions
Another thing to consider is to consult a financial advisor or industry expert for additional insight before investing.
How do I buy stocks?
To buy stocks in Ireland, you'll need to open an account with a brokerage, either online or traditional. You can then research and select the stocks you wish to buy, place your orders, and then keep an eye on your investments for potential adjustments as required. It’s recommended to do your research and seek financial advice when needed.
What’s the difference between stocks and bonds?
Bonds represent debt issued by a company or government, while stocks represent ownership stakes in a company. When an entity issues a bond, they're essentially borrowing money and agreeing to pay interest to bondholders. Interest is typically paid annually as the debt is repaid gradually, making bonds a relatively safer choice for short-term investors.
The process of selling stocks and bonds also differs. Stocks are traded globally on various stock exchanges like the New York Stock Exchange in the US and the London Stock Exchange in the UK. On the other hand, bonds are typically sold through traditional brokerages rather than on exchanges.
Is there a safer way to grow your money?
If you seek a risk-free way to grow your money, consider deposit-protected savings accounts like demand deposits, savings bonds, or high yield savings bonds. These savings accounts allow you to increase your savings without putting your capital at risk.