How to Begin Investing in the Stock Market - Buy While the Buying's Good

Buy low, sell high. That’s the maxim for investing in the stock market, and that makes now a great time to buy even if you don’t have a lot of money to invest. There are two ways to invest in the stock market – mutual funds and individual stocks. Both carry possible risk as well as reward. Read on for a quick course in Investing 101, and to see how you can invest in the stock market with only a small amount of money.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Internet access or phone access
• Money to invest
• Tolerance for volatility

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   BROKERAGE ACCOUNT
   
   Open a brokerage account online, by phone, or in person so you can transfer money into the account and make your stock purchase. Use a reputable company such as INGDirect, TD Ameritrade, or your own bank.

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   STOCKS vs. BONDS
   
   A share of stock is a piece of ownership in the company that issues the stock. Stocks are also known as equity investments, and the purpose of owning stock is the hope that the value of the shares will increase (or grow) over time. Therefore, even though stocks may pay a small dividend on an ongoing basis, the real reason to buy stocks (either through mutual funds or individual shares) is for the growth of your “principal” investment.
   
   Corporations or governments (local, state, or federal) issue, or sell, bonds as a way to borrow money from the public. Bonds are known as debt investments, and the purpose of owning bonds (either through mutual funds or individual issues) is for the interest income they pay.

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   MUTUAL FUNDS
   
   Mutual funds are a way for many investors to pool their money to buy stocks, bonds, or other securities that are selected by investment professionals. The mutual fund investment portfolio managers buy and sell stocks or bonds within the fund as they make predictions about future performance.

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   INDIVIDUAL STOCKS
   
   Buying individual shares of stock directly means you hold those shares in your name.

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   ADVANTAGES AND DISADVANTAGES
   
   Mutual Fund Advantages:
   
   Diversification - The investment professionals who manage a mutual fund purchase stock in many different companies. This process is called diversification. Companies in different industries (health care, finance, manufacturing, etc.) perform better or worse in different economic environments. In other words, diversification = more safety and stability in your principal investment.
   Investment Amount – Shares of mutual funds are usually less expensive than individual shares of stock, so you can invest in the stock (or bond) market with only a little money.
   
   Individual Shares Advantages:
   
   Control – You decide exactly the company(ies) in which you own shares.
   Cost – Your only cost will be when you buy or sell your shares. No management fees will be charged.
   
   Mutual Fund Disadvantages:
   
   Diworsification - Owning a variety of mutual funds without professional advice can result in owning different funds that have the same objective, thereby losing the advantage of the diversification. This condition is known as over-diversification or Diworsification.
   
   Management Fees – Because professionals manage mutual funds, you will always pay a management fee for their investment knowledge.
   
   Individual Shares Disadvantages:
   
   Cost – Individual shares of stock usually cost more than shares of mutual funds in the same industry.
   
   Volatility – Owning shares in one or two companies means you are subject to how those particular companies perform. This means you are more likely to experience ups and downs in the principal value of your shares than you would in a mutual fund.

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   CONCLUSION
   
   The easiest way to invest in the stock market with a little money is through a *no-load mutual fund with at least a 5-year investment history. The fund returns should follow the performance of the S&P 500 +/- 1%. Be prepared to ride out the down times in order to reap the rewards when the market is up.

Tips & Warnings

• Be sure to click on the links around the page to learn more about investing in the stock market.
• If you found this article to be helpful, please feel free to link it to your blog or email it to your friends!
• All investments in the stock or bond market are subject to loss of principal. Only invest money that you can afford to lose if things don’t go your way.
• No investments in the stock or bond market are insured by any federal agency such as FDIC.
• Before investing in mutual funds, read the fund prospectus and understand the difference between loaded and no-load funds.
• Realized vs. Unrealized Gains/Losses - Don't forget, just because the value of your stock or mutual fund purchase is down doesn't mean you've lost money. That's what's called an unrealized loss. The same goes for an unrealized gain. You only gain or lose money if you SELL your stock or mutual fund shares when the market is at a certain point.

[mistyblue1965]

on 6/27/2009 Very helpful information on what, where, and how to start when you're thinking about the stock market.

[sonni57]

on 5/11/2009 Investing in the stock market can be a great way to save money if you know what you're doing.

[makaksa]

on 5/11/2009 Nice article on getting started with investing.

[JoyfulOne]

on 5/11/2009 Wow, thanks for the information. It was really helpful!

[waters]

on 5/11/2009 Good information on how to begin investing in the stock market.