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Time to stock up

Fernando J. Saballos, Contibutor

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A stock is ownership in a company. In addition to being a product for accumulating wealth, stocks grant voting rights; and, based on the weight of your shares, your voice is heard in the management of the company. Often times, you will be sent a proxy vote notification from your brokerage, and you’ll be able to vote online. A lot of the voting matters might seem complex, but it’s just another reason to do thorough research on the company before you invest in it.

While having authority in a company is exciting, your mind, no doubt, is always focused on one thing: accumulating wealth.

There are two forms of accumulating wealth from stock: capital gains and dividends. Capital gains are simple: If the share price of a stock increases from the initial purchase, you are at a gain. Once you choose to sell, you “realize” the gain. Gains are deposited into your account, and once they settle, you can use them however you please.

Dividends are a form of income that a company pays, typically quarterly, to its investors, at a certain amount per share. You can choose whether to realize the dividend income or reinvest it in the company for ownership in more shares. Dividends, however, are established at the discretion of the company. The largest and most senior companies are often the ones to pay out dividends. They’re sustainable enough to pay out quarterly in order to keep investors satisfied. Why don’t all large corporations such as Amazon, Facebook, and Netflix pay out dividends? I can’t speak on behalf of their investment strategies, but luckily, you will always know which companies pay dividends as that information is readily available for free on numerous financial research websites.

The younger generation of investors often takes for granted the convenience of living in an age where technology has made trading vastly more efficient and affordable. In present day, this is as simple as the click of a button and your order is executed almost instantaneously. Past images of motor-mouth brokers yelling across a trading floor or bidders fighting their way through the floor of a stock exchange to buy and sell are long gone. Today, I can research a stock, get a real-time price quote, and trade five minutes before a class starts, all via my broker app. By the time the professor barks at us to put our phones away, I’ve gained ownership in a company. The affordability comes in the form of significantly reduced cost of trading. Once upon a time, most commissions were percentage based. Buying $500 worth of stock might cost you three percent ($15), but now, brokerage firms charge flat rates so that same $500 can cost $8.95 (Charles Schwab) or $7.95 (Fidelity). This improvement in client services minimizes cost and maximizes opportunity.

Something else to keep in mind, in addition to fees, is what else could potentially eat into your profits. Taxes are always a factor with investments. While exact tax amounts vary, depending on income, the simplest thing I can tell you is that long-term investments, those holding for longer than a year, are taxed at a lower rate than short-term investments. Further details on rates and bracket can be found at www.IRS.gov or www.taxfoundation.org

 

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Time to stock up