Basics of Investing in Stocks

As you work on getting out of debt and building wealth, you will need to begin learning about the basics of investing. Today’s post will discuss how to purchase stocks for your investment portfolio.

What are stocks? Stocks are basically shares of ownership in a company. For example, if someone wants to invest in a company in order to build wealth, that person would want to consider owning shares of stock in the company. I feel safe to say that most people have heard of McDonalds as it is a global company, so I will use it as a sample illustration. I decide to take time to research McDonalds, and then decide that McDonalds is a company I believe will continue to be a strong company. Be cautioned here; do your research! Don’t just invest on a whim without analyzing the numbers. Never invest in stocks if you do not understand how they work! There are many free investing webinars and videos on the Internet that teach the basics of investing.

To purchase shares of McDonalds stock, a brokerage account would be required. E*TRADE, Charles Schwab, Ameritrade, and Scottrade are examples of brokerage firms. Once an account has been opened and funds have been deposited, buying and selling of stocks can begin.   If a share of McDonalds stock is trading at $112.57 and you have $1,000 to use to purchase the stock, divide $1,000 by $112.57 to see how many shares you can purchase. In this case, you could purchase 8 shares of McDonalds stock and would have a little less than $100 dollars left. Brokerage fees vary per trade but $9.95 is what I usually pay per trade.

You might be wondering how money can be made on stocks. A realized gain on stock is the result of selling the stock at a higher price than you paid for it. An unrealized gain is when you still own the stock, but the price has increased. I call this a gain on paper. In other words, I will only realize the gain if I sell the stock at a higher price than I paid for it. If you sell the stock for $126.50 and you paid $112.57 you would earn a gain of $ 101.49 [($126.50 – 112.57)*8 -$9.95].

Another way to make money by investing in stocks is through dividend income. A dividend is money that is paid out of earnings to investors. McDonalds currently pays a dividend of $3.76 per share of stock. If you own the 8 shares of McDonalds stock from our example above, you would also receive $3.76 per share per annually which equals $.96 quarterly or 4 times per year. The total amount you would receive annually in dividends on 8 shares of McDonalds stock this year is $30.08. The current dividend yield is 3.34% for McDonalds stock.

Check out a few videos on stock investing found at http://www.investopedia.com/university/beginner/.

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