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I am a undergraduate student at Northeastern University. I am majoring in International Business and Spanish and am currently on co-op with John Hancock. I am very interested in the stock market and options, and love finding new ways to invest.
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Intriguing Investing
  • Basic Stocks: A How To For Investing 0 comments
    Jul 13, 2014 10:59 AM

    This blog is dedicated to helping to understand basic terms of the stock market as well as analyzing interesting stocks and stock options.

    This week I will talk about the most basic tool of the stock market: Stocks themselves


    Stocks are perhaps the simplest tool for investing. When an investor purchases a stock, they are in theory, purchasing a part of the company. For example, if I was to purchase one share of Apple Inc., I am now a shareholder of the company. I own part of the company (even if my ownership percentage is absolutely minuscule). In owning stocks of the company I now have the right to vote on some smaller things within the company, though with only one share of a giant company my vote likely would have no impact whatsoever. I also have the right to obtain any dividends that the company gives out. If the company has a 1 percent dividend on their $600 stock and their next dividend payout was November 15, then I would receive a $6 payment on November 15 (if I hold the stock for that long).

    So how do I buy a stock?

    Investors can create an account with an online stock brokerage dealer such as E-trade or TD-Ameritrade. They can deposit money and then go on and buy shares. Shares move down and up in price based on consumer conceptions about the stock, stock news, and macroeconomic events. When purchasing a share, you buy the amount of shares that you want at the current market price or can set limit purchases or use other buying tools that are available to investors. If you are to buy at the market price, the stock will be bought at whatever price the stock is set at when you press purchase (more or less depending on bid and ask prices). For example, if I wanted to buy 100 shares of Ford at the market price which is $17.47, it would cost me 1,747 dollars. Similarly if I wanted to buy 200 shares of Boeing at its current market price of $128.09 it would cost me $25,618 (200 times 128.09). If I thought the price of Boeing was too high and I would only buy it if it lowered to $125, I could set a limit buy order on it. By setting a limit buy order, I have set an order to buy the stock when (if) it decreases to my set limit price. Thus if Boeing goes down to $135 in two days, the order would be executed at that time that it hits that price, and the purchase of 200 shares would cost me only $25,000. By using a limit buy order, an investor can make sure that they are purchasing the stock at price they are comfortable with.

    So why would I buy a certain stock?

    The question that all investors would like to have answered: Why should I buy this stock? There are a multitude of different reasons to buy a stock and which ones are chosen differ from person to person. People look at stocks and buy because they think they are good companies who have great growth potential. Others buy just because they like the companies or have a gut feeling. Some use qualitative and quantitative statistics to determine if a stock is worthy of a purchase. Clearly when somebody buys a stock, they want the price to go up. Thus people want to find stocks that have growth potential or are undervalued and will likely go up in price. There are many statistics that are important when investing such as price to book ratios and strong financial statements and balance sheets. However, what each person looks for is different and everyone has a different idea of what to look for in a strong stock. When investing it is useful to first establish what you want in a stock and then find stocks based on those guidelines.

    So what happens after I purchase a stock?

    In long term investing, investors remain patient and let the stock stand in their portfolio (collection of stocks) for a long period of time. However, this is not always easy if your stock falls and decreases in value and people are often tempted to sell quick and either gain a quick profit or sell before massive losses occur. This can sometimes be the right move, but it can also sometimes be a terrible mistake. Personally I purchased a large quantity of a certain stock recently at a price of below $.50. The stock saw fantastic news and rose quickly to a price of over $2. The stock then dropped to $1.78 and I panicked and sold it so that I could realize my gain before it dropped further. If the stock would have dropped further I would have made a great choice. However, the stock continued to climb and ended up at a high of nearly $5 later in the week. That is the world of investing. As investors we do not know what stocks are going to do. We can make educated guesses but we will never know for sure. You can sell or you can continue to keep your stock in your portfolio and hope it keeps going up. As investors we need to just make decisions based on guesses and predictions about what the stocks are going to do.

    Impact of a price change on a stock-

    Lastly I will talk about what investors want to hear about the most: Money. When a price increases by $1 it has the exact opposite effect that a $1 decrease would have. For example, in my previous Ford example, the price could increase $1 to 18.47. If it does this, I would gain the increase multiplied by my amount of shares. In this situation, the value of my shares would now be $1,847 as compared to its previous amount of $1,747. Similarly, if the price decreased by a dollar the value of my stocks would be $1,647. I could sell it at $1,847 when it goes up by a dollar and see a profit of $100 (not including transaction costs). However, the stock could keep going up in price. Your call investor!

    Investing in stocks is a dangerous game to play if you do not know what you are doing, but there is also a lot of money to be gained if you are smart and play the market well. There are people who have made millions and billions of dollars in the stock market. However, there are also those who have lost millions. The stock market is an interesting world and holds many opportunities but you have to know how to play it. Hopefully this piece has helped those who do not understand the market or who are new to it to understand better.

    To end this introduction to stocks and investing in them, I have included two graphs of popular stocks that show how their prices can change. The first is a graph of the stock price of General Electric over the last year. It also shows the daily trading volume of the stock.

    The other is a graph showing the volatility of Twitter on their first day as a publicly traded stock in November of 2013. This graph does well to show how much a stock can potentially move in one day (though IPO days do tend to me more volatile).

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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