by Michael Sanibel

Created on: October 05, 2008   Last Updated: October 11, 2008

Stocks: Worth the risk?

A share of stock grants you fractional ownership in the company that issues that stock. It entitles you to your share of profits, losses, and dividends that the company generates through normal operations. If a company is successful and increases its business reach and product lines, you can expect to benefit through a rise in the market value of its stock. Conversely, if the company is having problems and suffers a loss of sales, the likely outcome is a decline in the stock price.

It's also possible to make money when prices fall by "shorting" a stock. Your broker will borrow that stock from another account and sell it at the current price with the hope that you can buy it back later at a lower price. You pocket the difference.

Many larger, established companies that have predictable revenues and cash flows elect to reward their shareholders with dividend payments. Newer companies that are focused on growth and expansion usually won't pay a dividend until such time as their balance sheets support it.

Since the advent of the internet, trading stocks online has become hugely popular. To take advantage of this stock investment option, the first step is to open a brokerage account with one of the online brokers. This will require a cash deposit which will be available to you when you decide to purchase online stocks. Once the account is set up, you will be able to buy and sell stocks and bonds as well as most mutual funds.

Another option is to deal with a stockbroker by telephone or in person. Licensed brokers have a direct link to the stock exchanges which allows them to buy and sell shares in real time. Every time a purchase is made, the company name and shares bought will appear in your stock portfolio, and the market values will be reported monthly.

The amount you make is dependent on how much money you are willing to invest, and the level of risk you are willing to assume. Like most investments, the higher the risk you take, the higher the potential rewards if that investment pays off. However, higher risk also means greater losses if the investment fails. Your goal is to "buy low and sell high" and profit from the increase in stock prices over time.

Some people believe that the greatest percentage returns are available in "penny stocks" which are traded on the Over-The-Counter (OTC) Bulletin Board (also known as the Pink Sheets). This is where stocks are traded that do not qualify to be listed on one of the major stock exchanges. They are typically shares in companies that trade for less than $5 and have few regulatory requirements. As such, they can be extremely risky since there is little or no government oversight into their financial condition.

It's vitally important to know what you are doing before risking your hard-earned cash investing in stocks. For best results, select a reputable online broker that offers low commissions, online research capabilities, and fast and reliable trade executions.

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