This article is part of the investing basics series from InvestingHero.ch
How do stocks work?
In a nutshell — Stocks are a small piece of ownership in a company. By buying stock in a company, you are entitled to receive part of the profits as the company value increases over time.
You can buy stocks in thousands of companies — from established global blue chip stocks (large established companies with billion dollar valuations) to small cap Swiss companies, there are plenty of options to start investing in stocks.
As the company becomes more profitable and successful the stock value increases, at which point you could sell the stocks you own for a profit.
That said, you are generally far better off buying the stock and holding for longer periods of time vs selling a stock as soon as you make a quick profit.
By holding for longer periods of time, you can reinvest any dividends through your stock broker, thus increasing your portfolio value and stake in the company.
Woah what.. dividends? Backup a second..
What are dividends?
Remember that owning a piece of the company means you are entitled to the profits they generate — those profits come in the form of a dividend. Essentially a slice of the profits which are paid to share owners.
Yes that’s right, it’s basically a payday!
And you could get dividends paid in cash into your bank account.
But Investing Hero says no.
If you are the early stages of your investing journey, and with the long-term investment game in mind, you are generally far better off reinvesting any dividend profits generated.
Related article: 8 Common Investing Mistakes You Must Avoid (Specifically step 1)
By reinvesting you are buying more shares with your dividend payment, thus increasing your portfolio size and value.
Stocks vs. Shares definition — What’s the difference?
Stocks are a general term for the investment, with shares being more specific on the actual company you’ve invested in.
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