Why Do People Buy Stocks

Investing in stocks has historically outpaced practically all other investment classes. Since 1950, the stock market has returned about 9.8% on average per year, which gives the investor an approximate doubling of his or her investment every seven years. But why stocks?

Many investors are looking for ways to develop an investment portfolio that will grow over time and produce income on a regular basis. You can’t expect to make money from the stock market if you don’t know what it is. And now that you know what stocks are, now it’s time learn why people buy stocks and why they’re a great investment.

What is a stock?

A stock is a type of security that entitles the holder a fraction of ownership in a company. Through the ownership of this stock, the holder may be granted a portion of a company’s earnings, distributed as dividends. Broadly speaking, there are two main types of stocks, common and preferred. Common stockholders have the right to receive dividends and vote in shareholder meetings, while preferred shareholders have limited or no voting rights. Preferred stockholders typically receive higher dividend payouts, and in the event of a liquidation, a greater claim on assets than common stockholders.

How do you buy a stock?

Most often, stocks are bought and sold on stock exchanges, such as the Nasdaq or the New York Stock Exchange (NYSE). After a company goes public through an initial public offering (IPO), their stock becomes available for investors to buy and sell on an exchange. Typically, investors will use a brokerage account to purchase stock on the exchange, which will list the purchasing price (the bid) or the selling price (the offer). The price of the stock is influenced by supply and demand factors in the market, among other variables.

What is the difference between a stock and a bond?

When a company raises capital by issuing stock, it entitles the holder a share of ownership in the company. By contrast, when a company raises funds for the business by selling bonds, these bonds represent loans from the bondholder to the company. Bonds have terms that require the company or entity to pay back the principal along with interest rates in exchange for this loan. In addition, bondholders are granted priority over stockholders in the event of a bankruptcy, while stockholders typically fall last in line in claim to assets.

Key Benefits of Investing In Stocks

Stocks can be a valuable part of your investment portfolio. Owning stocks in different companies can help you build your savings, protect your money from inflation and taxes, and maximize income from your investments. It’s important to know that there are risks when investing in the stock market. Like any investment, it helps to understand the risk/return relationship and your own tolerance for risk.

Let’s look at three benefits of investing in stocks.

Build. Historically, long-term equity returns have been better than returns from cash or fixed-income investments such as bonds. However, stock prices tend to rise and fall over time. Investors may want to consider a long-term perspective for their equity portfolio because these stock-market fluctuations do tend to smooth out over longer periods of time.

Different Stocks, Different Benefits

The two main types of equity investments below can each offer investors different benefits.

Common shares

Common shares are the most (you guessed it!) common type of equity investment for Canadian investors. They can offer:

Capital growth. The price of a stock will go up or down over time. When it goes up, shareholders can choose to sell their shares at a profit.

Dividend income. Many companies pay dividends to their shareholders, which can be a source of tax-efficient income for investors.

Voting privileges. The ability to vote means shareholders have some measure of control over who runs the company and how.

Liquidity. Typically, common shares can be bought and sold more quickly and easily than other investments, such as real estate, art or jewellery. This means investors can buy or sell their investment for cash with relative ease.

Advantageous tax treatment. Dividend income and capital gains are taxed at a lower rate than employment income and interest income from bonds or GICs.

Preferred shares

Preferred shares can offer investors the following benefits:

Reliable income stream. Generally, preferred shares come with a fixed dividend amount that must be paid before any dividends are paid to common shareholders.

Higher income. Compared to common shares, preferred shares tend to pay higher dividends. (Note: preferred-share dividends come with the same advantageous tax treatment as dividends on common shares.)

Variety. There are many types of preferred shares, each with different features. For example, some allow for unpaid dividends to accumulate, while others can be converted into common shares.

Here are the reasons why people invest in share market:

Wealth creation

In its very essence, investing in shares is about accumulating and multiplying wealth. The most basic tip about how to invest money in the share market that traders follow is ‘buy low, sell high’.

Another share market basic for wealth creation is investing for the long term. This is because businesses go through a lifecycle, and investors need to give their shares enough time for value creation. This is possible only if they stay invested in a particular stock over a period of time.

Opportunities to own

Buying shares of companies implies that the investor owns a part of that company, thereby allowing him to enjoy the profit that the company makes. The part of the company owned is equivalent to the percentage of shares that he has purchased. As a partial owner of the company, he will be kept informed about company news and updates.

Portfolio diversity

Investing in shares adds diversity to the investment portfolio. The portfolio could now give investors several sources of income – from real estate, stocks, interest earned from bank accounts apart from his chief source of income.https://www.youtube.com/embed/ADtUmXIWLpc?autoplay=0&rel=0&volume=0&enablejsapi=1&origin=https%3A%2F%2Fwww.angelone.in

Minimizing loss

The Indian share market comprises a number of companies, enabling investors to distribute their investments rather than committing all their resources into one. If the losses of one company lead to the depreciation of some of their shares, the successes of the other would help balance out their losses.

Easily accessible money

The money put into some types of investments, such as fixed deposits, cannot be accessed until the investment has matured.

In contrast, buying shares allows investors to sell them at any time, without a limit. The amount resulting from this transaction may be easily transferred to their bank accounts.

Combating risks

The primary fear when it comes to trading in the share market is unexpected losses. This may be overcome through stop loss, a feature that enables investors to give a mandate to their brokers about a specified price limit. If the value of their shares falls below this limit, they will be automatically sold, thereby saving them from incurring great losses.

Added benefit of dividends

A dividend is the payment that investors receive from the overall profit that a company makes. This amount may be paid in the form of money or more shares. It is important to invest wisely and choose a company that is trustworthy, because paying dividends to investors is not compulsory. However, most multinational corporations and established businesses do offer dividends, as this widens their shareholder base.

Example of Stocks

Apple (NASDAQ: AAPL)

Staying on the tech trend, Apple is next on the list. With a market cap of more than $2.46 trillion, the tech giant is one of the largest companies in the world, the largest company listed on the Dow Jones Industrial Average, and like the stocks mentioned above and the majority of those mentioned below, it has become a household name.

As you likely know, Apple is the creator of the iPhone, iPad, and Mac computers, with the iPhone representing the vast majority of the company’s revenue.

The stock had a strong start to the year, but gains tapered off in late January and again in late February, bringing the stock down to what many believe is a discount. While the stock has rebounded from the lows, there’s still a strong argument that the stock is undervalued.

In big tech, there are few growth stories that are quite as strong as Apple’s, especially in the fiscal third quarter of 2021. Here are some key stats from the earnings report:

Revenue. The company generated $81.43 billion in revenue, up 36.44% on a year-over-year basis.
Net Income. Net income came in at 21.74 billion, up 93.2% year-over-year.
Earnings Per Share (EPS). Finally, EPS came in at $1.3, up 100% year-over-year.

All of these figures beat analyst expectations by wide margins.

Some argue that the growth is the result of Apple’s status as the leading global device manufacturer. Others argue that the growth was fueled by spending as a result of stimulus payments given to U.S. consumers. Some say it’s a mix of the two.

No matter where it came from, this growth is impressive.

It’s these impressive numbers that form the basis for the overwhelmingly positive analyst opinions on the stock. Out of 23 analysts covering AAPL stock, 17 rate it a Buy, six rate it a Hold, and none rate it a Sell, with an average price target of $167.09 per share, representing the potential for more than 12% gains, according to TipRanks.

Notwithstanding recent volatility, the stock is currently trading with a relatively high valuation when compared to the industry average. However, like other big tech names on this list, the high valuation associated with the stock is offset by the strong growth seen in revenue and earnings, growth that many believe will continue for the foreseeable future.

4. Gevo (NASDAQ: GEVO)

Gevo isn’t necessarily the type of company you would expect to see on a list like this. The company is anything but profitable, and the stock was still trading in the penny category in late 2020.

Nonetheless, Gevo has seen an exceptional rise thus far in 2021. Year to date, GEVO stock has climbed by more than 60%, and that’s after recent profit taking as the stock touched record highs.

Gevo is a clean energy company, but the company isn’t making solar panels, windmills, or batteries. Gevo is focused on the production of clean, renewable fuels, making it an interesting take on exposure to energy stocks.

Over the past several years, the company has perfected technology that allows it to turn renewable feedstock like waste wood and food scraps into clean, renewable fuels, including jet fuels that have been used to power commercial flights.

Recently, Gevo has been getting quite a bit of attention from proponents of clean energy and demand from airlines and fuel distributors around the world. That attention has been amplified in recent months as a result of a change in political tides.

With President Joe Biden in the White House and Democrats in control of Congress, many expect there to be major clean energy legislation in the coming months. As a result, companies that operate in the clean energy space are likely to benefit from the following:

Grants. Grants will likely be provided to clean energy companies like Gevo to fund research and to increase the supply of clean energy products.
Tax Cuts. The federal government is likely to further support clean energy companies through tax policies that benefit green energy producers, helping these companies to keep funds in house and offer more competitive pricing of clean energy to consumers.
Increasing Demand. Many expect tax credits to be provided to consumers who take advantage of clean energy products. Should this be the case, consumer demand for these products will likely increase — yet another plus for Gevo.

Expecting a rise in demand, Gevo is in the process of building its first Net Zero production facility, where it will be able to produce massive amounts of clean fuel with a net zero carbon footprint. The facility is expected to be completed and operational by the end of 2021. This has quite a bit to do with its lack of profitability. The company is following a growth business model like that of Amazon.com, investing in infrastructure early to stay ahead of the curve later.

At the same time, Gevo has a strong balance sheet due to a recent capital raise, and with the clean energy movement gaining steam, it has plenty of support from the retail investing community. This, combined with a recent dip in price that creates a compelling value opportunity, makes Gevo stock worth its position on your watchlist.

Conclusion

Common stocks can be a great investment vehicle for both beginning and experienced investors. In fact, there are three main reasons people choose to invest in common stock: appreciation, income from dividends and capital gains. Common stock is a part ownership in a company and entitles the owner to share in its profits and assets. Each share of common stock will have voting rights and will receive a portion of any profits distributed by the company as dividends .