I was so honored to answer investor questions at the first financial planning workshop in partnership with Clever Girl Finance about a week ago, and the best part is I am still receiving some pretty great questions from attendees! Here are a few more commonly asked questions when you are new to the investing world.
A company I really like is about to issue its initial public offering (IPO), how do I go about buying into it?
It's great that you're looking to buy into a company that you already know and understand! Unfortunately, not all IPO shares are open for the broader public to purchase on the first day of trading. Many of the shares released on the first day are reserved for large-scale investors only. If the sale of the stock is open to the public, you can look at the "underwriting" section of the company's registration with the Securities and Exchange Commission (SEC) to find the names of the banks or financial institutions involved with the IPO. Then you can look for a broker (or discount brokerage firm) who is affiliated with that institution. If that's too complicated, and you plan to hold the stock for a long time, you can wait a day or two for more shares to be available on the marketplace.
I often hear investors talk about "shorting" a stock; what does that mean?
In a nutshell, "shorting" a stock is not quite as simple as "selling" a stock. Investors usually short stocks when the current trading price of the stock is overvalued by the market and current valuation metrics. In the shorting process, the investor essentially "borrows" the physical stock from a brokerage firm and sells it to another buyer. If the stock price goes lower, the investor who shorted the stock profits from the difference in the buy/sell prices after they repay what is owed to the brokerage firm. This is referred to as "trading on margin." In order to short a stock, you must trade through a broker (whoever holds your brokerage account), which will lend you more money to trade than you actually have in your account at a fixed interest rate. Shorting stocks is considered an aggressive trading strategy, as you must be able to replace the lost money quickly if your bet proves to be bad. On the other hand, when you "long a stock" it means you are buying and holding the stock for an undetermined amount of time.
What is the difference between preferred stock and common stock? Is one better than the other?
Not all publically traded companies offer preferred and common stock together, but on the surface there is not a drastic advantage of one versus the other. Common stocks are ownership interest in the company and these owners are referred to as "shareholders." If a stock's price increases from the price the shareholder bought it, they then gain money. Preferred stocks are a longer-term form of fixed-income investing. This means that the company pays dividends to preferred stockholders at regular intervals, which can be either fixed or floating. With that said, the preferred stockholder does not instantly benefit if a stock's price increases, as would be the case with a common shareholder. If the company becomes bankrupt or insolvent, preferred stockholders are entitled to whatever assets are left to distribute once the other debt holders are paid. Common stockholders are the last ones in line for repayment and therefore might not recoup any value from their lost shares.
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