The end of 2012 brought about a flurry of articles touting the gains achieved by the rich in having their money work for them. How did they do it? Where do you start? Investing in the stock market can be daunting to consider, but armed with the basics, anyone can try their luck at increasing their net worth in the stock market.
When we talk about investing in the stock market, we are taking about investing in a strategy. This strategy can involve trading in a diverse group of issues including commodities, bonds, options, stocks, and mutual funds. Let’s take a moment to discuss the basics of investing in stocks.
What is a stock?
A stock is, in its most basic form, is a piece of a company. Companies that offer bits of ownership, or stocks are said to be “publicly held.” Owning a stock in a publicly held company means that you own a “share” of the company along with other shareholders. When the price of a security or stock increases, as a shareholder you are sharing in the profits. Alternatively, if the price of a stock declines, so does the value of the stock.
How do I purchase a stock?
Publicly traded companies buy and sell shares of stock on an exchange. The three major exchanges in the U.S. are the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), and the National Association of Securities Dealers (NASDAQ). A broker-dealer will allow you access to these exchanges in order to buy or sell stock. Some companies however allow you to purchase stock directly from the company through direct stock purchase plans. A more common practice is to select either a discount or full-service broker. Large banks also employ brokers and can attach your bank account to your trading account.
How do I know if my stock is doing well?
The best indication is price and a good way to measure a price is watching an index. An index is a representation of a stock exchange. The London Stock Exchange provides an index which might indicate hesitations in the European markets, while the New York Stock Exchange may reflect a weak U.S. dollar. On an elemental level, a stock price alone can be inflated or devalued for any number of reasons. For example, a popular software company might have shares selling in the 100s, while a lesser known environmental company may be trading below its earnings per share (EPS).
What are other ways of owning stock?
When investing in stocks or choosing to buy shares, a good practice is to diversify. To diversify means to spread your risk among a number of securities from a variety of industries and areas. A closed-end fund allows an investor to buy into a mutual fund or index fund via a per share price. As a mutual fund is a professionally managed collective investment, and while these investments may be made directly with a mutual fund company, they can also be purchased as individual shares on an exchange. Similarly, index funds or ETFs are also purchased and sold as individual shares and represent a collection of securities on a given exchange.
As a new investor, look to a financial advisor of qualified advice. In today’s market a savvy approach is to keep things simple.