Many women I have spoken to about investing in stocks often tell me they find the whole process “intimidating”, “full of jargon”, and “too risky”- with most avoiding them all together. It doesn’t matter what income level or life-stage they are at – the conversation is pretty much the same.
However, it’s not an asset class women can afford to avoid. I strongly believe stocks play an important role in us achieving financial wealth and security. And I also know women are smart and more than capable of wise choices when it comes to investing in them.
Studies agree. They show women are better investors, and because they take a longer-term view and are less likely to “churn” stocks – they are set up for greater success than men.
So here’s my pledge to you. I’m going to break down the essentials of what you need to know about investing in stocks. These will be articulated into several digestible pieces in the “Your Money/Invest” section. I’m confident that whatever level of understanding you have about equities, you can pick up some guidelines and knowledge to become a better investor.
What are stocks?
Stocks are often referred to as “equities” and represent an investment, or part “ownership” of a company. How much of an ownership you have will depend on the number of shares you’ve bought compared to the total number available. I put ownership in quotes because that term means something slightly different in this context.
As a shareholder, you have certain rights. If you own “common stock”, you have the ability to vote in shareholder meetings, receive dividends (which are a piece of the company’s profits) if and when they are distributed. And you have the right to sell your shares to somebody else whenever you want.
If you own “preferred shares”, you will hold a higher claim of ownership in the company’s earnings than common shares. You will also have an idea of when to expect a dividend because they are paid out at regular intervals and before dividends to common shareholders. Preferred shares usually don’t give you voting rights.
Why should you consider owning stocks?
Most individuals don’t buy stocks for the ownership rights but rather to make money! With ownership comes the potential to get a piece of the earnings and make a positive return. Here’s how:
- Capital gains: If a company makes a profit, they have a choice to put that money back into the company and use it to grow their earnings further. The potential for this is often recognised by investors like yourself and they may be want to buy shares. There may be other reasons why there’s greater demand for the stock and this drives up the price. If the price is greater than when you bought it and you decide to sell it, you’ve made your own profit (often referred to as capital gains).
- Income: The company can also pay some of the profits out by way of dividends to you (usually cash) as mentioned before. This gives you the potential for an income stream.
Remember, the price you pay to buy the stock, or the price you receive when you sell, is determined by how interested other investors are in owning it. This is the law of supply and demand. If there’s a lot of buying the stock price will move higher. And, if there’s a lot of selling, the price will fall.
What are the risk and rewards of owning stocks?
Rewards:
- Over time, stocks as an asset class generally produces higher returns for you than other types of investments such as the cash left in your bank account and bonds. Having stocks in your portfolio is a sound strategy to grow your wealth and especially beating the impact of inflation. (see types)
- If a stock’s price goes up, you can sell some or all of your shares for a profit. You may want to also hold them for a longer time to increase your chances to grow the value of your portfolio.
Risks:
- However there is the risk the price can fall. Why? Sometimes the company finds itself struggling at a point in time leading some investors to be less interested in selling, driving down shares. Sometimes the whole stock market or the industry in which the company operates get’s hit with bad news, so investors get nervous and sell. If you sell your stock at a price below where you bought it, you could lose money (generate a negative return).
- Companies do not have to pay a dividend even if they generate a profit. They may also choose to reduce it or eliminate it if times are tough – although these decisions are usually not taken lightly.
- While uncommon, if a company goes out of business or files for bankruptcy, you could lose the entire value of what you invested in its stock.
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