The original purpose of stock was to provide a way for entrepreneurs to sell fractional shares of ownership in their companies for the purpose of raising capital to finance launch and development. Mature companies also sell stock to fund corporate projects such as the acquisition of plant and equipment as well as other companies. This raising of capital through the issuance of stock is done through initial public offerings (IPO) or secondary offerings on the public markets. Stock trading provides liquidity to shareholders who wish to sell their holdings.
Initial Public Offering
People buy stock on an initial public offering because it is traditionally priced inexpensively so it attracts buyers. After the IPO, the brokerage firms that underwrote the stock support its price for 60 days, during which it is likely to trade up in price. People like to buy stock on an IPO because there is a good chance that they can sell it for a quick profit. Some people, who want to hold the stock for the long-term potential they see in the issuing company, buy on the IPO because they feel the price they pay is likely to be a bargain.
Some stocks pay dividends, and dividend income is taxed at a lower rate than ordinary income. Many people seeking income from their investments find dividend-paying stock to be a good investment because it provides tax-advantaged income with the possibility of price appreciation. Many companies that issue dividend-paying stock have stock reinvestment plans, which automatically reinvest the dividend in more common stock. This is a painless way to accumulate stock over the long run and is attractive to people seeking to build large portfolios for retirement.
When you think of buying stock, the first thing that comes to mind is the profit you may be able to make by holding it until its price trades above your cost basis. Many investors enjoy researching various stocks to find the one that is currently undervalued in the marketplace and likely to experience a quick price appreciation as other investors discover it or it is recommended by a stock analyst.
Day trading, or buying and selling stock within a very short period to take advantage of the natural fluctuation in the market price, has become more popular since the Internet has made it possible for an investor to watch the real-time price movements and quickly trade in and out of the stock for small amounts of profit. A day trader may trade in and out of an active stock several times in one day, accumulating small profits each time but making considerable total returns.
Professional traders will tell you that trading stock profitably is not as easy as it may appear. Never invest money you cannot afford to lose. Never borrow money to invest in a stock. Never invest money you may need in the foreseeable future, because you may be forced to sell out your position when the stock price is at a temporary low.
Victoria Duff specializes in entrepreneurial subjects, drawing on her experience as an acclaimed start-up facilitator, venture catalyst and investor relations manager. Since 1995 she has written many articles for e-zines and was a regular columnist for "Digital Coast Reporter" and "Developments Magazine." She holds a Bachelor of Arts in public administration from the University of California at Berkeley.