Investing in stocks is one of the most profitable ways to build wealth over the long term. Learning to invest in stock wisely and with patience over a lifetime can yield a portfolio far outpacing the most modest income.
Here are the several things to know how to invest in stock.
6. Stock Market Capitalization (Why You Should Care)
A stock’s market capitalization (cap) is its true value, the sum of the total shares multiplied by price. It has more meaning than the share price because it allows you to evaluate a company in the context of others of the same size in its industry.
You can use a market cap as a filter to screen for companies to balance your portfolio. A small-cap company with stock capitalization of $250 million to $2 billion doesn’t need to compare to a large cap. The ranges from $10 billion to $100 billion.
Overall, market capitalization influences your investment returns.
7. Why Stocks Split
A stock split is when a company increases its total shares and is frequently done on a 2-for-1 ratio. So, if you own 100 shares of a stock priced at $80 per share and worth $8,000, after the split you’ll have 200 shares priced at $40 each, and still worth $8,000.
Stock splits occur when prices are rising in a way perceived to deter smaller investors. They can keep the trading volume up by making it easier for a larger buying pool to trade. If you invest in a stock, expect to experience a stock split at some point.
8. What You Should Know About Stock Prices
A $50 stock can be more expensive than an $800 stock because the share price means nothing on its own. The relationship of price-to-earnings and net assets is what determines if a stock is over- or under-valued.
Companies can keep prices artificially high by never conducting a stock split, yet without having the underlying foundational support. Make no assumptions based on price alone.
9. Investing in Preferred Stock
Preferred stock is very different from shares of the common stock most investors own. Holders of preferred stock are always the first to receive dividends, and in cases of bankruptcy will be first to get paid.
However, the stock price does not fluctuate (up or down) the way common stock does. Preferred stock is a hybrid of common stock and bonds.
10. Dividends 101
Dividend investing refers to portfolios containing stocks that consistently issue dividend payments year-in and year-out. These stocks produce a reliable passive income that can be especially helpful in retirement.
Dividend reinvestment is a way to accelerate portfolio growth. Still, you can’t judge a stock by its dividend price alone. Sometimes companies will increase dividends as a way to attract investors when the underlying company is in trouble. Dividends are taxable.