When you buy a stock, you're buying a small piece – or a share – of a company and that company’s future.
What is a stock?
Stocks are the most common type of security, with more than 65,000 stocks available today.
There are two types of stock: common and preferred. In most cases, when people talk about stock, they’re referring to common stock. The majority of all stock sold is issued in this form. Common stockholders are owners who can vote on stock splits, company mergers and director elections, but they don’t get to vote on the payment of cash or stock dividends.
Preferred stocks are similar to bonds in structure, but they trade on the stock exchange like common stocks. Preferred stock is called this because it has a preference over common stock with respect to dividends and if the company has to liquidate its assets due to bankruptcy. However, unlike common stockholders, preferred stockholders don’t get a vote.
How do stocks work?
As a stock investor, there are two basic ways you can make money:
If you sell your shares for more than you paid for them, you keep the difference, which is referred to as a capital gain. Conversely, if you sell your shares for less than what you paid for them, this is called a capital loss.
Dividends are a little piece of the company’s profits, typically paid quarterly. Companies don’t have to pay dividends to their shareholders, but many times they do. It’s important to note, even companies that have historically paid a dividend can stop at any time.
Stocks typically fall into three investment categories.
Growth and income
Large-cap companies, as well as REITs and utilities.
Small- and mid-cap companies, excluding REITs and utilities.
Micro-cap companies, companies with share prices below $4, research-restricted stocks and emerging-market stocks.
Common investing strategies
All investing strategies have one goal in common: maximizing returns while minimizing risk. While there are lots of ways to do this, here are some of the most common investing strategies for stocks:
Strategy 1 – Value investing
This is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic, or book, value. The basic idea is straightforward: If you know the true value of something, you can save a lot of money when you buy it on sale. Generally speaking, value investing requires investors to remain in it for the long term and to apply effort and research in their stock selection.
Strategy 2 – Growth investing
Rather than look for low-cost deals like value investors, growth investors look for investments that offer strong upside potential when it comes to the future earnings of stocks. They typically invest in growth stocks – young or small companies poised to expand – expecting to profit by a rise in their stock prices. However, such companies are untried, and thus often pose a fairly high risk. Investors who follow this strategy should be watchful of executive teams and news about the economy.
Strategy 3 – Income investing
Here the focus is on dividend-paying stocks that can be counted on as a source of money requiring little, if any, extra work or input from the investor. These portfolios generally contain safe, blue-chip stocks with conservative balance sheets and a history of maintaining or increasing dividends per share – even during rough economic times. The upside to this strategy: You get a generally reliable, additional source of income – albeit modest. The downside: You don’t get the benefit of compounding interest because earned income is paid out instead of reinvested.
Strategy 4 – Momentum investing
Like the name implies, momentum investors ride the waves, capitalizing on the continuance of an existing market trend. This usually involves a strict set of rules based on technical indicators that dictate when you should get into and out of the market for certain stocks. Because this strategy attempts to capitalize on market volatility, momentum investing involves a higher degree of volatility than most other market strategies.
Our stock selection do's and don’ts
We don't promote the hottest, newest stock you heard about on TV, on social media or from a friend. There are investments we just won't sell; we believe there's too much risk. Here's why we believe in quality:
Total stock returns
Companies that we believe can produce both current dividends and long-term dividend growth offer greater consistency and less volatility than lower-quality, non-dividend-paying stocks.
Resilience in down markets
Standard & Poor's (S&P) offers rankings for individual stocks using a system of A through D. The ratings are based primarily on the consistency of a company’s earnings and dividend growth during the past 10 years. We believe higher-quality companies (B+ and higher) are usually able to generate more consistent earnings and dividend growth.
Diversification is a strategy to help make sure your investments aren't concentrated in a certain type or area. By spreading your money among many different sectors, you can help reduce your risk. One of the keys to successful investing is learning how to balance your comfort level with risk against your time horizon.*
Put time on your side
Quality and diversification work only if you hold your investments through both good and bad markets. Of course, even quality stocks can go down if the market drops, which may cause you to second-guess your strategy. But don't. Remember why you're investing, and talk with your financial advisor. Don’t lose sight of the importance of time. Focus on the long term and remain disciplined during short-term market volatility.
Here are two ways you can put time on your side, besides holding on to the stocks themselves:
Try to invest regularly when you have money available. Don’t wait for the “perfect” time to put money in the stock market. This strategy allows you to buy more shares when prices are lower and fewer shares when prices are higher, and it’s the best way we know to “buy low.”
If you don’t need the income, reinvest your dividends into the same or another investment (whatever is appropriate). This can help build up the number of shares you own, either in stocks or mutual funds over a period of time.
How we can help
As with all the investment options we offer at Edward Jones, we start with you. Before we recommend any stock, we find out what’s important to you, what kind of future you see for yourself and how much risk you're comfortable taking to get there. To begin, find an Edward Jones financial advisor near you.
1 Diversification does not guarantee a profit or protect against loss in declining markets.
Investing in equities involves risks. The value of your shares will fluctuate and you may lose principal.