Stock investment presents many outstanding advantages, like diversification, liquidity, greater returns compared to ‘safer’ investments, and protecting your wealth from inflation. With so many benefits, it’s only natural that eager investors want to jump right into stock investment. However, if you’re new to purchasing stocks and the stock market, there’s so much you need to know before you get started, including the following facts: 


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You Need to Pay Tax On Stocks

Like most investments, you must also pay taxes on stocks. However, how stock options are taxed in the U.S. may be different from how you imagined. You must pay tax when you purchase stocks, and it’s the difference between the strike price and its fair market value. For example, if you purchased a stock for $1 and its fair market value is $2, you would pay tax on the $1 difference. 

You must also pay tax when you sell the stock. How much you pay typically depends on the window of time between when you bought and sold it. You can either pay a short-term capital gains tax or be taxed at your regular income tax rate. 

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You Should Know What Stocks Are

You might have heard that, like real estate, stocks are a great investment option. Still, that doesn’t mean you know what they are. Stocks are also known as shares and equities and represent a small amount of ownership in a company. When you buy a stock, you become a shareholder and claim a portion of a company’s assets and earnings.

There are two main stock types – ‘common’ and ‘preferred’. Buying common stocks means you have voting rights and possibly even receive dividends. If you buy preferred stocks, you have fixed dividends and typically less voting power. 

You Should Understand What Companies Do

It’s easy to assume that you’re making a good stock-purchasing decision when the price is right. However, that’s just one factor to consider when buying shares with your hard-earned savings. You should have an in-depth understanding of the company so you can assess its potential for future growth and profitability. Find out:

  • What they manufacture
  • Where they are located
  • The services they offer
  • How they sell their goods and services
  • The countries they sell in

The more information you have, the easier it can be to determine whether they are a viable investment option. 

The Risks and Rewards

When you learn that S&P 500 average returns are around 10% annually, not adjusted for inflation, you might be eager to jump straight into buying your first stocks. There are certainly lucrative gains to be made, but awareness of all risks and rewards can be helpful.

The rewards include knowing that stocks have historically outperformed many other investment types, like savings accounts and bonds. However, stock prices can fluctuate dramatically, which means you can be at risk of losses. Daily price swings can also be frustrating to watch. 

Stocks can be a great investment option, especially when you seek diversification and liquidity. However, there’s so much you need to learn before you dive right in. Prioritize these research opportunities above to make your next investment with confidence.