Generating Wealth Through Stocks: Unlocking the Power of Ownership
The Foundations: Understanding Stocks and their Significance
Welcome to Wise Wealth's comprehensive guide to understanding stocks! In this post, we will look into the fascinating world of stocks, discover their purpose, mechanics, and how they can play a crucial role in building wealth. Whether you're a beginner investor or someone curious about the inner workings of the stock market, this guide will provide you with the knowledge and confidence to navigate the world of stocks.
Today, we will cover the following topics:
What is a stock?
Ways to make money with stocks: Capital gains and dividends.
Different types of stocks: Common stocks, preferred stocks, growth stocks, value stocks, dividend stocks, and blue-chip stocks.
Understanding market capitalization: Large-cap, mid-cap, and small-cap stocks.
And last but not least: The importance of research and risk tolerance in investing.
Let’s move on into the first topic of today’s blog 💪🏻
What is a stock?
A stock, also known as a share or equity represents the ownership of a fraction of a company. When you buy a stock, you become a shareholder of the company, which means you have a partial ownership stake in the company. In addition, owning stocks is a really good way to invest your money. In fact according to Investopedia investing in stocks and holding them is one of the best ways to grow wealth over the long term. Stocks are bought and sold on the Stock exchange (click on the link to learn more from Business Insider about Stock Exchange) and are the foundation of many investors’ portfolios. Also something important to know is that every stock has a symbol. Stock symbols are unique identifiers used to represent publicly traded companies on stock exchanges.
For example: the Symbol of Apple Inc is AAPL
There are two ways to make money with stocks:
Capital gains: Let’s say you buy a share of Apple for 50 dollars and after a month that share is worth 55 dollars. If you sell it for 55 you’re making a profit of 5 dollars. Those 5 dollars are your capital gains.
Dividends : Dividends are company profits paid to shareholders. Some companies offer dividends (while others don’t) which vary in percentage and frequency. It's important to consider both the consistency and yield of a company's dividend payments. Remember, dividends are not guaranteed.
Types of stocks
Now, let's explore the different categories of stocks and provide an example for each:
Common stocks: These are the most common type of stocks that investors typically purchase. When you own common stocks, you become a shareholder in the company and You may also receive dividends if the company chooses to distribute profits.
Coca-Cola (KO) is a common stock
Preferred stocks: Preferred stocks offer certain advantages over common stocks, such as a fixed dividend rate and priority in receiving dividends and assets during liquidation. It’s more likely to receive dividends.
Wells Fargo & Co (WFC) is an example of preferred stock
Here is a video to understand better the difference between Common stocks and Preferred stocks.
Growth Stocks: Growth stocks are stocks that generate substantial and sustainable positive cash flow. And whose revenues and earnings are expected to increase at a faster rate than the average company within the same industry.
Tesla (TSLA) is a growth stock
Value Stocks: Value stocks are considered undervalued by the market, presenting opportunities for investors. Meaning they are known for having stability, consistent earnings, and relatively low price-to-earnings ratios compared to other stocks in the market.
Chevron Corporation (CVX) is a value Stock
Dividend Stocks: Dividend stocks are shares of companies that consistently distribute a portion of their profits to shareholders in the form of dividends. Investors who prioritize regular income often invest in dividend stocks.
Verizon Communications (VZ) is a dividend stock
Blue-chip stocks: Blue-chip stocks represent shares of large, financially stable companies with a strong market presence.
Microsoft Corporation (MSFT) is a blue-chip stock
Small-Cap, Mid-Cap, and Large-Cap Stocks: Stocks are classified based on market capitalization or also know as “market cap”. The market capitalization (market cap) is a measure of a company's total value in the stock market.
It is calculated by multiplying the company's current share price by the total number of outstanding shares. Market capitalization reflects the market's perception of a company's worth and is an important indicator of its size and relative value.
Here’s an example below👇🏻
PepsiCo stock is currently trading at 184.01 dollars per share and it currently has 1,378,000,000 shares outstanding (the total number of shares issued and actively held by stockholders—both outside investors and corporate insiders, Investopedia).
To get the market cap we do the following calculation👇🏻
184.01 dollars x 1,378,000,000= 253.44 B
So the Market cap of PepsiCo is 253.44 billions of dollars.
Based on market cap, companies are generally categorized into three main groups:
Large-cap: These are companies with a market capitalization typically exceeding $10 billion. They are considered well-established and have a significant market presence.
Mid-cap: Mid-cap companies have a market capitalization between $2 billion and $10 billion. They are often in a stage of growth and expansion.
Small-cap: Small-cap companies have a market capitalization generally below $2 billion. They tend to be younger companies or those operating in niche markets.
Market capitalization is used by investors and analysts to evaluate the size, growth potential, and risk profile of a company. It provides insights into a company's standing within its industry and can influence investment decisions.
Here’s a link to see a Comparative chart to understand better.
To conclude this section, there is no a "better" nor “worse” type of stock. It all depends on your individual investment goals and the level of risk you are willing to take. Personally, I primarily invest in blue-chip stocks as part of my strategy, focusing on diversification across different industries. However, it's important to note that others may prefer to take on more risk and invest in mid-cap stocks or growth stocks. Ultimately, the choice depends on your own investment strategy and risk tolerance.
And remember…
"Successful investing is about finding the right balance between risk and reward, tailored to your unique financial goals."
I also want to mention that it is really important to do your research before making any investment. While investing in stocks can be a great way to generate wealth, it is also a volatile ride.
So it is important to know what your risk tolerance is to see if you can handle investing in stocks. Keep mind is this quote that Warren Buffet said 👇🏻
“BE FEARFUL WHEN OTHERS ARE GREEDY AND BE GREEDY WHEN OTHERS ARE FEARFUL”
This is just the beginning of my blog, and I will be sharing plenty of valuable insights about finance, so stay tuned! 🔥
Let’s learn in the Wisewealthway 📈