15 Things Investors Need to Know About Stocks

We all should consider investing in the stock market if we want to build wealth over a long period -- perhaps to support us in a comfortable retirement. But that doesn't mean we should all run to a brokerage right away and buy stocks. For best results, take some time to learn more about investing in stocks. Here are 15 things to know -- which can be a great start.

5 Stocks Under $49
Presented by Motley Fool Stock Advisor
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by The Motley Fool. I’d be sitting on a gold mine!" It's true, but we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Click here to learn how you can grab a copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

It can seem like a share of stock is kind of a lottery ticket, one that will or won't pay off for us. That's not the case, though. A stock is an actual small ownership stake in a company, in a real business. If the business prospers and grows, so should the value of your share of it. It can help to think of yourself as the co-owner that you are of a business, as you follow it in the news and root for it to succeed.

A common investing mistake is to confuse price and value. Don't assume that a low-priced stock is a great deal, for example. Understand that for best investing results, you would do well to seek companies that are both high quality and attractively priced. Warren Buffett clarified this when he said, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

ALSO READ: 3 Reasons Stock Price Doesn't Matter

Don't read too much into a stock's price, as it's not very meaningful on its own. To wring some meaning out of a stock's price, you'll need to relate it to something else. Multiply it by the number of shares outstanding and you'll arrive at its total market value, or market capitalization, for example. Relate it to earnings per share, and you'll get a P/E ratio.

A stock trading at $3 per share might be grossly overvalued, while a $500-per-share stock might be a terrific bargain, with an intrinsic value of $1,000. Sure, you can buy hundreds of the $3 stock with $1,000, but it may soon become worth $400, while you might buy two shares of the $500 stock and see them become worth $750 each.

ALSO READ: Value vs. Growth Investing: Which Stock Should You Buy?

Obviously, all other things being equal, it's better to invest in a profitable company than an unprofitable one. And it's also often good to favor fat profit margins. But sometimes it's OK to put some money in a not-yet-profitable one, as long as you can see profitability ahead. Many companies start out with little to no profits, until they grow bigger. Some companies even choose to remain unprofitable once they grow bigger, opting to plow as many dollars as possible into furthering their growth. At that point, though, they can rein in their spending and suddenly be profitable.

5 Stocks Under $49
Presented by Motley Fool Stock Advisor
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by The Motley Fool. I’d be sitting on a gold mine!" It's true, but we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Click here to learn how you can grab a copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Another kind of company to favor when you're assessing candidates for your portfolio is one with little or no debt. (Some debt can be OK, and some companies can make good use of it, especially when interest rates are favorable.) You can find debt listed on a publicly traded company's balance sheet, which should be made available every quarter when earnings are announced. The balance sheet typically lists short-term debt (along with other liabilities) and long-term debt. You might compare debt levels with cash levels and also check to see if debt has been growing or shrinking. Companies with a lot of debt are on the hook for repayments and may have less flexibility in how they spend their earnings. In a worst-case scenario, heavy debt might lead to bankruptcy.

ALSO READ: How to Read a Balance Sheet

It's common to assume that dividend-paying stocks are boring, slow-growth companies, suitable only for your grandparents' portfolios. But think again. These days, even companies such as Apple and Microsoft pay dividends, and IBM's dividend yield recently topped 5%! Think about that -- if you're bullish on IBM's future and expect its stock to be worth much more in the future, buying now will get you a 5% reward every year, while you wait.

Not trading in and out of stocks frequently means you'll need to get good at being patient. Many times, the best thing to do in investing is nothing -- if you have built a portfolio of promising stocks, just give them time to perform as you hope they will. Think of companies such as Apple or Microsoft and remember that they have increased in value phenomenally -- but over the long term, not overnight. Be a long-term investor.

Not trading in and out of stocks frequently means you'll need to get good at being patient. Many times, the best thing to do in investing is nothing -- if you have built a portfolio of promising stocks, just give them time to perform as you hope they will. Think of companies such as Apple or Microsoft and remember that they have increased in value phenomenally -- but over the long term, not overnight. Be a long-term investor.

ALSO READ: Why Patience Is the Most Important Factor in Successful Investing

Pay attention to diversification. It's smart to invest your money in only your best ideas, but if you only have three of them and one implodes, that can deal a cruel blow to your portfolio. We have suggested holding stock in at least 25 companies. You might invest in even more than that, but if you spread your dollars across hundreds of companies, one that explodes in value may not benefit you as much as you'd like. To some degree, your diversification might reflect your confidence -- the more confident you are in your holdings, the less diversified you might be.

5 Stocks Under $49
Presented by Motley Fool Stock Advisor
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by The Motley Fool. I’d be sitting on a gold mine!" It's true, but we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Click here to learn how you can grab a copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

You can't be very confident in your holdings if you don't keep up with them, so keep up with them: Read their quarterly and annual reports, and follow them in the news and at Fool.com. You want to know about any progress they make, any challenges they face, and any strengthening or deterioration in their health and growth prospects. The more you know about them, the smarter decisions you'll likely make regarding them.

Before investing in any company, get to know it very well. Read up on it -- such as its last few quarterly and annual reports. Read articles about it in the news. Read about its industry, too, and its competitors, so that you have a solid sense of how it compares with its rivals. Learn what competitive advantages it has and how sustainable they are. Learn what its business model is, too -- exactly how it makes its money.

For best results when getting to really understand how strong and promising a company is, you'll want to be able to read -- and understand -- its financial statements. There are three key ones -- the balance sheet, income statement (sometimes called the statement of operations), and the statement of cash flows. They can be intimidating at first, but learning to make sense of them requires no knowledge of rocket science.

ALSO READ: 3 Most Important Financial Statements

As you learn your way around financial statements, you'll start being able to estimate how undervalued, overvalued, or perfectly valued a stock appears to be. Ideally, you'll spend some time learning how to value stocks. There are multiple ways to do so, and there's no single exact value for any company, since there are always estimates of future growth involved. So don't rely only on a single measure, such as the price-to-earnings ratio or the PEG ratio. Learn to crunch various numbers, and look at a stock from different angles.

ALSO READ: The Definitive Guide: How to Value a Stock

Finally, if all these bits of advice have you thinking that this is going to be more work than you want or can do, make it easy on yourself. You can do quite well, and even amass a million dollars, simply investing in index funds. You'll need to do so over many years, of course, and you should aim to keep adding money to your investments over time, too. But index funds are sufficiently powerful to help you grow wealthy.

5 Stocks Under $49
Presented by Motley Fool Stock Advisor
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by The Motley Fool. I’d be sitting on a gold mine!" It's true, but we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Click here to learn how you can grab a copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Those are 15 bits of investing guidance that can help you improve your results, but they're not the only helpful tips out there. If you want your investing performance to get better and better, aim to keep learning, for the rest of your investing life. And if you'd rather just read mystery books, work in your garden, and perfect your golf game, just stick with index funds. That can be quite effective, too.

Selena Maranjian has positions in Apple and Microsoft. The Motley Fool has positions in and recommends Apple and Microsoft. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.