What is a Stock? Basic Steps to Start Investing in Stocks

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Introduction to Stocks

In today’s world, stocks are no longer a foreign concept, especially to those interested in the investment market. Stocks are often referred to as a unique asset class and a high-potential investment channel, alongside traditional options like gold or real estate. To successfully invest in stocks, one must first understand the basics of what stocks are and how stock investing works. In this article, we will explore the concept of stocks, their types, characteristics, and how to select good stocks for effective investment.

Understanding Stocks

What is a Stock?

A stock is a type of certificate issued by a joint-stock company, either in written form, as a ledger entry, or in electronic format, confirming ownership of a certain number of shares in the company. Only joint-stock companies can issue stocks. Additionally, under Article 4 of the 2019 Securities Law, stocks are considered securities and are tradable assets on the stock market.

Types of Stocks

Stocks are divided into two main types:

1. Common Stock: This type grants shareholders ownership rights, including the right to attend board meetings, vote on major decisions, and participate in managing and controlling the company.

   Example: A shareholder owning common stock in a tech company may vote on strategic decisions such as mergers or new product launches.

2. Preferred Stock: These stocks provide special privileges like higher dividends and the right to reclaim capital. Preferred stock is further categorized into:
   • Dividend Preferred Stock: Shareholders receive higher dividends than common stockholders but do not have voting rights.
   • Redeemable Preferred Stock: Shareholders can request the return of their capital, subject to agreed conditions.
   • Voting Preferred Stock: These stocks grant more voting rights but cannot be transferred.

   Example: A holder of voting preferred stock may have more influence in decisions like appointing board members but cannot sell their shares freely.

Characteristics of Stocks

• Initial Value: Each stock has a par value, determined by the issuing company. In Vietnam, there is no set minimum value for stocks, but in some countries, there are regulations regarding this.
• Ownership: Stocks represent ownership in the company, with their value tied to the company’s performance and market conditions.
• Liquidity: Stocks are tradable assets on the stock exchange and can be transferred between investors.

  Example: A stock in a rapidly growing company may see its market value rise significantly, offering high returns to the investor.

Why Invest in Stocks? Pros and Cons

Benefits of Stock Investment

• High Long-Term Returns: Owning stocks means owning a part of a business and benefiting from its growth. The average growth rate of companies on the stock market is around 20% per year, far higher than the 6-7% annual return from bank savings.

  Example: Investing in a successful startup could see the stock price rise dramatically, offering substantial returns.

• Liquidity: Stocks have high liquidity, second only to cash. Investors can quickly buy or sell stocks on the stock exchange.

  Example: In a bull market, stocks can be sold at a profit within minutes, turning the investment into cash efficiently.

• Flexibility: Stock investing requires significantly less capital than real estate or gold. Investors can start with just a few million VND and exit their position whenever the stock reaches the desired price.

  Example: A small investor could buy tech stocks with minimal capital and sell them after a few days or months when prices rise.

Risks of Stock Investment

Stocks can be volatile, influenced by economic cycles, political changes, and industry-specific trends. Therefore, timing and careful stock selection are crucial for minimizing risks.

Example: During a global recession, stock prices might drop sharply, affecting even the most promising companies.

How to Own Stocks

There are two main ways to own stocks today:

1. Buying Directly from the Issuing Company: Typically done during the early stages of a startup, where investors contribute capital in exchange for stock.

   Example: An investor might fund a startup in exchange for stock, which could later be sold for a profit when the company goes public.

2. Buying from Other Shareholders: Most stocks are traded on the stock market, where investors buy and sell among each other, not directly from the company.

   Example: Purchasing shares of a public company like Apple from another investor on the stock exchange.

Basic Steps to Start Investing in Stocks

Step 1: Open a Stock Trading Account

The first step to buying stocks is to open a trading account, which can be done online or at a brokerage firm.

Example: An investor can open an account with a brokerage firm like TD Ameritrade or Fidelity in just a few minutes.

Step 2: Fund Your Account

To purchase stocks, you need to deposit funds into your account. A small amount like 1-2 million VND is enough to start.

Example: A new investor may transfer 5 million VND to their account to buy their first set of stocks.

Step 3: Learn the Stock Market Trading Hours

Each stock exchange has specific trading hours. Knowing these times helps investors execute trades efficiently.

Example: The New York Stock Exchange operates from 9:30 AM to 4:00 PM Eastern Time.

Step 4: Learn to Read Stock Quotes

Understanding stock quotes is essential to avoid costly mistakes, like buying at a high price or selling at a low price.

Example: A beginner investor should familiarize themselves with the terms on a stock chart, such as bid price, ask price, and volume.

Step 5: Develop a Stock Selection Strategy

Create a list of criteria for choosing which stocks to invest in, such as financial performance or industry trends.

Example: An investor might prioritize stocks in companies with consistent revenue growth and low debt levels.

Step 6: Analyze and Value Stocks

Once you identify promising stocks, conduct a thorough analysis to ensure they are worth investing in.

Example: A value investor might analyze financial ratios like the price-to-earnings ratio before making a decision.

Step 7: Choose an Investment Strategy

Selecting a suitable strategy is key to success. Options include long-term growth investing or short-term trading based on market trends.

Example: A long-term investor may hold onto stocks for years, while a day trader profits from short-term price movements.

Conclusion

Investing in stocks is a highly flexible and potentially profitable venture. With the right knowledge, strategies, and careful decision-making, investors can capitalize on the market’s growth to achieve their financial goals.