How to Invest in the Stock Market
Understand the stock market., Familiarize yourself with different kinds of stocks., Learn about how stocks increase and decrease in value., Find out about dividends., Understand why you want to invest.
Step-by-Step Guide
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Step 1: Understand the stock market.
In order to invest properly, you need to understand what the stock market is and how it operates.
Here's a basic rundown of terms and processes:
Stocks.
Also referred to as "shares" or "equity," a stock is a certificate that gives the holder part-ownership of a company.
In order to raise money, a company releases shares that the public can buy.
Each share represents a small percentage of ownership in that company.
Shareholder.
This is a person who owns shares in a company.
A shareholder can hold as few as one share and as many as millions.
Shareholders are given votes in the company and earn a percentage of the profits.
Stock Market.
This is where shares of companies are bought and sold.
It can be a physical place or a virtual market.
The three primary stock markets in the US are the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), and the National Association of Securities Dealers Automatic Quotation System (NASDAQ).
All are accessible through stockbrokers, both by phone and online. -
Step 2: Familiarize yourself with different kinds of stocks.
There are two main types of stocks: common and preferred.
Common stock is the form of stock most recognizable to newcomers.
It is a share in a company.
Common stock can give some of the highest returns in investing but comes with the largest risk.
Preferred stock gives ownership like common stock does, but does not bestow voting rights.
The dividends paid out by preferred stock are fixed instead of variable like common stock.
Preferred stock is a more secure source of dividend income than is common stock.
Stocks can also be broken down into different classes if the company chooses.
Typically, a company will make one class of share have more voting rights than the other, to make sure that certain groups maintain control of the company. , Stocks operate according to the law of supply and demand.
As the demand for a stock increases and more people are interested in buying than selling, the price of the stock goes up.
This is because there is less supply of the stock and each share becomes more valuable.
Stocks generally increase in demand as the company succeeds, and their demand lowers if the company performance suffers.
Demand is often based on expectations of future performance.
When investors feel that the company will be performing better in the near future, demand will increase.
It is impossible to predict with any certainty how the overall stock market will behave.
This is why there is so much risk associated with this form of investment. , Dividends are a benefit paid to shareholders at the discretion of the board of directors.
Stable companies often pay dividends to keep investors happy when their stock price does not rise much.
Dividends are a great way to earn "passive" (automatic) income over a long period of time. , Ask yourself why you want to invest and what you expect to gain from it.
The stock market can be very volatile, and a bad day could see you lose a significant part of your investment.
Good investors invest for the long term.
If you are looking to cash in right away, the stock market might not be a good place to put your money.
Don't invest if you are trying to get out of debt.
Make sure any high-interest debts are taken care of before investing in the stock market.
Successful stock investing requires dedicated time from the investor.
Ask yourself if you have the time to investigate companies for at least a few hours a week.
Such research is extremely important.
There are many research services available to do some of the leg work for you.
Look online for websites like Scottrade, ShareBuilder, Motley Fool, E-trade, TDAmeritrade, TradeKing, Morningstar, and TheStreet, to name just a few.
It is very dangerous to pick stocks without first investigating them thoroughly. -
Step 3: Learn about how stocks increase and decrease in value.
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Step 4: Find out about dividends.
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Step 5: Understand why you want to invest.
Detailed Guide
In order to invest properly, you need to understand what the stock market is and how it operates.
Here's a basic rundown of terms and processes:
Stocks.
Also referred to as "shares" or "equity," a stock is a certificate that gives the holder part-ownership of a company.
In order to raise money, a company releases shares that the public can buy.
Each share represents a small percentage of ownership in that company.
Shareholder.
This is a person who owns shares in a company.
A shareholder can hold as few as one share and as many as millions.
Shareholders are given votes in the company and earn a percentage of the profits.
Stock Market.
This is where shares of companies are bought and sold.
It can be a physical place or a virtual market.
The three primary stock markets in the US are the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), and the National Association of Securities Dealers Automatic Quotation System (NASDAQ).
All are accessible through stockbrokers, both by phone and online.
There are two main types of stocks: common and preferred.
Common stock is the form of stock most recognizable to newcomers.
It is a share in a company.
Common stock can give some of the highest returns in investing but comes with the largest risk.
Preferred stock gives ownership like common stock does, but does not bestow voting rights.
The dividends paid out by preferred stock are fixed instead of variable like common stock.
Preferred stock is a more secure source of dividend income than is common stock.
Stocks can also be broken down into different classes if the company chooses.
Typically, a company will make one class of share have more voting rights than the other, to make sure that certain groups maintain control of the company. , Stocks operate according to the law of supply and demand.
As the demand for a stock increases and more people are interested in buying than selling, the price of the stock goes up.
This is because there is less supply of the stock and each share becomes more valuable.
Stocks generally increase in demand as the company succeeds, and their demand lowers if the company performance suffers.
Demand is often based on expectations of future performance.
When investors feel that the company will be performing better in the near future, demand will increase.
It is impossible to predict with any certainty how the overall stock market will behave.
This is why there is so much risk associated with this form of investment. , Dividends are a benefit paid to shareholders at the discretion of the board of directors.
Stable companies often pay dividends to keep investors happy when their stock price does not rise much.
Dividends are a great way to earn "passive" (automatic) income over a long period of time. , Ask yourself why you want to invest and what you expect to gain from it.
The stock market can be very volatile, and a bad day could see you lose a significant part of your investment.
Good investors invest for the long term.
If you are looking to cash in right away, the stock market might not be a good place to put your money.
Don't invest if you are trying to get out of debt.
Make sure any high-interest debts are taken care of before investing in the stock market.
Successful stock investing requires dedicated time from the investor.
Ask yourself if you have the time to investigate companies for at least a few hours a week.
Such research is extremely important.
There are many research services available to do some of the leg work for you.
Look online for websites like Scottrade, ShareBuilder, Motley Fool, E-trade, TDAmeritrade, TradeKing, Morningstar, and TheStreet, to name just a few.
It is very dangerous to pick stocks without first investigating them thoroughly.
About the Author
Victoria Murphy
A passionate writer with expertise in pet care topics. Loves sharing practical knowledge.
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