An Intro to the Stock Market
Before you delve into the stock market, it's wise to learn some fundamentals. New investors can find investing tricky. Once you learn the ins and outs, the stock market may not seem so intimidating.
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Stock
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Companies issue stock to raise money. When you buy stock, you are buying a part of the company. The goal of any investor is to buy stock when the price is low and sell when the price is high. The idea is to buy stock in a company you believe will become more valuable over time. Maybe the company is going to introduce a new product, or maybe the company has consistently strong financial reports. The more people want to buy stock in a company, the more the value of the stock increases. When the stock is less in demand, the price per share goes down.
The Market
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As an investor, you can buy stock in the primary or secondary market. When a company first issues stock, it is on the primary market and is called the initial public offering. Buying in the primary market is the first opportunity to buy. When investors sell their stock, it enters the secondary market through a buyer's market with a trading floor, like the New York Stock Exchange, or through a dealer's market, where the trading happens through a computer or telephone, like the Nasdaq. The primary and the secondary markets make up the stock market.
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Buying Stock
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The most common method to buy stocks is through a brokerage. You can choose a full-service brokerage house that can offer you advice and manage your account. For instance, a full-service broker can do the research for you to advise you on which stocks to buy and can suggest when you should buy or sell. Full-service brokers usually are paid on commission. They do not receive compensation based on how well your stocks do; they receive commission based on how much you trade. Some full-service brokers, therefore, have an interest in getting you to trade often. You can also use a less expensive online discount brokerage that does not offer advice or manage your account but simply conducts your transactions.
Indexes
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A common way to track how your stock and the market as a whole is doing, is through stock indexes. The Dow Jones Industrial Average is an index of the 30 largest and strongest companies. When you hear that the DJIA went up, it means that the average value of the companies on the DIJA went up, not necessarily your stock. The Standard and Poor's 500 Index tracks 500 company stocks. The Russell 2000 Index tracks 2,000 smaller companies. The Christian Science Monitor explains that you should only follow the indexes as an indicator of how your stock is doing compared to other stocks in the index. For example, if the Russell 2000 is up and your stocks that are listed on the Russell 2000 are down, then you know that your particular stocks are underperforming. To keep track of your own stock, you would check the financial section of a major newspaper. You can also check online at sites like Yahoo! Finance or, for larger companies, on their website.
Dividends
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Some stocks pay dividends. Companies pay dividends out of their profits at a certain amount per share. So, if you owned 100 shares of a company paying a dividend of $.25 per share, you would receive $25 in dividends, which are normally paid quarterly. You will normally have the option of taking your quarterly dividends or reinvesting them to buy more stock in the same company. Companies are not required to pay dividends. Many new companies, for example, will put profits back into the company. Other companies may reduce dividends or eliminate them all together when profits are down.
Risk
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Buying stocks comes with risk. If the stock you invested in falls far below what you paid, you have to decide whether to sell and take the loss or hold on, in hopes you'll make up for your losses and possibly more. The payoff to the risk is that you have the potential to make multiple times your original investment, and often faster than in other, less risky, investments.
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