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Why Invest in Stocks?

  • Lauren 

 

While some businesses operate solely from their proceeds and reserve capital, others need to raise additional revenue to cover debts or to create the capital needed for growth. One way for a company to create money is to become a corporation and sell parts of itself to the public. These parts are referred to as stock or shares.

When a company “goes public”, an initial valuation is set which covers both the number of shares that are for sale, as well as how much these will be worth in total. After this, however, investors value a corporation based on how much stock is available for sale, and the general perception of how well the business is performing.

 

When a company is doing well, or even when it does better than expected, its price is likely to rise. When a company does badly, or fails to meet analyst forecasts, its value typically goes down. People who focus on this type of venture try to predict price movements so that they can buy when the prices are low, and sell when the prices are high, in order to earn a profit.

There are several indicators that people can rely upon to determine the direction of potential price changes. Some individuals focus on fundamentals.

This involves looking at quarterly and annual earnings reports and watching for news events such as major production increases or layoffs which could have a positive or negative impact on the company’s bottom line. Others are more interested in technical reports. Technical specialists work with charts to try and find mathematical patterns which signal good times to buy and sell.

While investors have been buying and selling stocks for centuries, the rise of the internet and personal computers has changed this type of trading significantly. Until recently, most people needed to work with a broker, who often took a significant commission in exchange for arranging for transfers between buyers and sellers.

Additionally, stocks were typically purchased without the use of leverage, meaning that the buyer had to raise the full value of the shares before completing the purchase, making this an activity that was primarily for the rich.

However, individuals eventually gained more direct access to stock sales, resulting in increased popularity.

Beginning in the 1990s, CFD trading also allows profits from price movements without needing to take physical ownership of the underlying instrument. This type of transaction could also be done on margin, letting investors enter into contracts by putting down only a fraction of the original value.

Stock sales continue to offer an excellent way to profit from knowledge of a given company’s performance.

 

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