Shares and Stocks and Bonds OH MY!

The stock market game can be very profitable or you can lose your shirt. Actually, considering the instability of the market over the last two years you would be lucky if you only lost your shirt. The key to investing in shares is to fully understand what you are getting in to and how to choose a good stock for your portfolio.

Stocks are sold on the market as portions of a company.  They are also often referred to as shares. When you purchase stocks of a company you become a share owner in that company. Investors who are looking for capital growth opportunities purchase stocks.  Stocks do not pay interest although they may pay dividends.  Investors make money on stocks when they purchase the stock at $10 per share and sell it at $25 per share.

Start Slowly

When starting to invest in the stock market, start slowly.  You should not trade daily, but you should watch your stocks daily, so that you become comfortable with the fluctuations and volatility when investing in these types of high risk investments.

It is very important that investors understand how to evaluate a stock and how to decide which stocks to buy. Do not take tips from other investors, especially from your dentist’s brother, or from your cousin’s second cousin once removed. Do the research, both on the historical performance of the stock as well as the company itself.

Many finance websites such as Yahoo finance and Google finance allow you to obtain information on stocks for free.  You can see the current trading price; the previous day’s trading prices as well as other financial information such as the highs and lows of the last 52 weeks. This is all information that will help you decide if you want to purchase that stock. You can also follow a stock’s performance and get information on stocks from the broker website that you use.

The Two Types of Broker Accounts

There are two different types of Broker accounts that you can open to purchase stocks.  The first type is a Discount Broker Service such as E*Trade. These are trading accounts where transactions are processed over the phone or online.  There is no advice offered to clients.

The fees for Discount Broker accounts are on a per trade basis and are discounted for multiple trades.  The regular free for an online or telephone trade could be $24.95 but if you transact more than 100 times per year your per trade price may drop to $9.95. Discount Broker accounts are good for new investors who will not be trading on a regular basis, for investors who only want to buy one particular stock, or for average investors who are willing to manage their own portfolio.

The second type of brokerage account is a Full Service account which is offered by firms such as RBC Dominion Securities or Edward Jones.  These types of accounts are usually designed for investors with larger amounts of money who wish to purchase a variety of investments such as bonds, stocks, and foreign investments. They also charge an annual fee as well as a per trade fee.

Bonds

Bonds are another type of investment that may be used to diversify an investor’s portfolio. Bonds are a safer investment that bears interest. Unlike with a stock your initial bond investment will not grow. However you will regularly earn a guaranteed interest on bonds. Governments as well as Corporations offer bonds to clients at a fixed interest rate for a pre determined time frame.  If you invest $10,000 in a bond for 5 years, at the end of those 5 years you will still have your $10,000 and have also earned interest on your money.  Bonds are never guaranteed and investors may be at risk that companies could go bankrupt and not be able to repay their debts to investors.

Whether you are new to investing in the stock market or you are an investment veteran, you should remember to be smart and not greedy. If you make good investments, save your earnings. Keep your initial investment and your gains in separate accounts.  Eventually your gains will become your initial investment and then you are only at risk of potentially losing your gains..

(photo by epicharmus)