- The "stock market" is a general term that really means any means by which stocks are bought and sold. It includes stock exchanges like the New York Stock Exchange, buying stocks "over-the-counter" or online, and purchasing shares directly from the company that issues them. When you buy shares of stock, you become part owner of the company, and the value of your stock will usually increase if the company does well--or fall if it doesn't. Many stocks pay dividends that provide income as well.
- When a company issues stock, it does so to raise capital for improvements or expansion. Once the shares are issued, they normally are permanent and can be bought and sold by investors. There are a number of ways people buy stocks, but the two most common are to select a company and then buy shares in that company. To do this wisely requires that you research the stock and then keep an eye on its performance. As an alternative, many investors use mutual funds. A mutual fund is a professionally managed portfolio of stocks selected and monitored by the fund manager. This enables an investor to avoid the time and effort of researching and selecting individual stocks. You still need to learn about a mutual fund's past performance, requirements and keep an eye on its current performance, but this is much less work and is better for people who don't have the time or inclination to manage a stock portfolio themselves.
- Buying stocks is easy--brokers and mutual funds want your business, so they have many options and make it as simple as possible. You can open an account at your bank, which will charge moderate fees but may have low investment minimums for existing customers. You can also open an account with a mutual fund or buy shares in a fund through a brokerage firm. If you choose to buy stocks individually, you'll need to have such an account. For those prepared to do their own research, a discount broker is the best route, since they charge very low fees. In recent years, direct stock purchase plans (DSPP) have become popular. Using this method, you buy shares directly from the company through an authorized agent with extremely low transaction fees, but you may not be able to other stocks with a DSPP account.
- Investors want one of two things from buying shares on the stock market: growth in the value of their investment or income from it (or both). Which is more important depends on an individual's investment strategy. A young person is likely to want to increase equity, while a retiree is more likely to buy stocks that pay high dividends to provide income. Both approaches offer the opportunity of much better returns than putting money in a savings account or a bank CD. There are other benefits as well. Profits on long-term investments fall under capital gains tax rules that reduce tax liability. Anyone who has earned income can open an Individual Retirement Account (IRA), which also provides excellent tax benefits.
- Realize that buying stocks always involves some risk. Unlike a savings account, your investment is not insured by the government, and you can lose money. The advantage, of course, is that if you invest carefully, you are very likely to have better returns. Always do your homework before investing. If you opt for mutual funds, study a fund's history for the last 5 years, order a copy of the fund prospectus and read it so you know the rules for that fund. Pick a "no-load" fund. These do not charge a portion of your investment up front in addition to ongoing fees. For stocks, learn about the company, its history and future prospects. Go to the company website section for investors to get information and order a copy of the company's annual report. Once you've invested in a stock or a mutual fund, you don't have to watch it every day, but do monitor it on a regular basis.
- Financial markets offer a wide variety of ways to invest money besides buying stocks. You can speculate on options or commodity futures, buy stocks on margin, trade in foreign currencies, etc. It's unwise for a novice investor to try these alternatives to buying stocks. Most are high risk and you need specialized knowledge to do well. If you want alternatives to buying stocks, the two safest alternatives are buying bonds or opening a money market account.
