Stock Market for Dummies: How it Works and How to Make Money

When saving for future goals, you want your money to work for you, but savings accounts and bank CDs can yield returns of less than 1%. You’ve thought about investing in the stock market, but fears of a crash and losing everything keep you from pulling the trigger. To get the most from your hard-earned dollars you have a great opportunity in stocks. Armed with a bit of knowledge about how the market works, types of stocks available, and characteristics of a balanced portfolio, you can invest intelligently to achieve the greatest return.

stock market trader

Stock Market for Dummies: What is the Stock Market?

The stock market – there are numerous markets world wide actually – is where investors buy and sell shares of ownership in public companies such as Facebook, IBM, and Coca Cola. The New York Stock Exchange and The Nasdaq, both in New York City, are the major U.S. markets. Corporations issue shares to raise capital for operations or expansion plans. When you purchase a share of stock (usually via telephone or on line), you become part owner of that company. You can buy shares, holding them for as long as you like, and sell them when you find a more attractive offer or to take profits. Share prices can change every day, and one key tenet of stock investors is “Buy low and sell high”.

Stock Market for Dummies: How do I Make Money?

Investments in the stock market generate income in two ways: through dividends and capital gains. Dividends are paid to investors and are based on the company’s earnings and number of shares you own. Amounts paid can vary as can payment schedules. Capital gains are more like profits. When you sell a share of stock at a higher price than when you purchased it, the increase in value of the share is your capital gain. In most cases, capital gains are taxed at a lower tax rate than are dividends. Over time, receiving dividends and holding stocks as their share price increases can both help you to accumulate wealth.

Stock Market for Dummies: What About Risk?

The stock market does present an element of risk, and this alone keeps many would-be investors away. However a look at any graph depicting the long-term performance of the market will show steady growth as well as ups and downs that occur over shorter periods. Oil prices, natural disasters, and medical breakthroughs all can have an effect, positive or negative, on stock prices. When the value of a stock share decreases, most investors hold that position knowing it will recover its value and continue its upward trend.

If you are willing to invest money and know you will not need it for at least five years, then the stock market has proven to be a reliable and profitable option. However, if you know you will need specific funds within a five-year time frame, then the stock market may not be your best option because there may not be enough time to recover from a temporary downturn.

Stock Market for Dummies: Your Involvement

Most investors have neither the time to research multiple corporations nor the confidence to manage stock portfolios. The good news is that financial advisors are available to help. When you open up a brokerage account with an institution such as Fidelity Investments, you will meet with a financial advisor who will ask you about your investment goals and risk tolerance among other things. From there you will both assemble a stock portfolio, and future purchases or sales can be made by either you or your financial advisor depending on your desired level of direct involvement.

For those investors who want to take a hands on approach there is plenty of information to guide you with your stock market decisions. Organizations like TD Ameritrade and ETrade actually have rating systems for different stocks, and you can get up to the minute buy, sell, or hold recommendations. Be aware that you must open an account with them to access these resources.

Stock Market for Dummies: Maintain a Diversified Stock Portfolio

Diversification is the key to reaping the most from your investment dollars. Having a diversified, or well balanced, stock portfolio simply means that you have a mix of investments in small, medium, or large companies. The size of a corporation is usually referred to as its market cap. Furthermore, you want a blend of international stocks along with domestic shares and a variety of investments in different business sectors: energy, health care, hospitality, and computer hardware/software for example.

Absent a market correction or a bear market, large companies may thrive while smaller businesses struggle; next year the exact opposite might be true. Oil prices rise so energy companies profit more. New health care laws can affect profitability of health insurers causing their stock values to fluctuate. Any number of activities in foreign countries can send stock prices higher or lower. The key is this: Cover all your bases by having many sectors and company sizes represented in your portfolio. Also think about corporate bonds as a more stable counter balance to stock price fluctuations.

Stock Market for Dummies: How to Get Started

It is not difficult to open a brokerage account. A brief on line search will yield contact information for many reputable firms. Should you decide to engage a private investment advisor who does not work for a particular institution, use caution. You want an advisor with a proven track record of success and no serious complaints filed against him or her. Well-qualified financial advisors want to know you and get a sense for your investment goals. Be prepared to answer some important questions:

  1. How much money would you like to invest?
  2. How long do you think it might be before you have to tap into this money?
  3. What is your tolerance for risk? Can you handle the emotions that come with a down market?
  4. Do you have personal sectors or types of companies you want to avoid or that you want to focus on?
  5. Do you want to reinvest any dividends and capital gains you make to buy additional stock shares?

Formulate questions you may have of your potential advisor. The one you absolutely want to ask is, “What are your fees?”. All of this guidance comes with a price.

person working with stocks

Summing It Up

Whether you decide to take a hands on or hands off approach to investing, looking to the stock market for solid returns has proven to be one of the best options available for accumulating wealth. Over time with a well balanced portfolio, you can build an income stream that will help to provide for you in retirement or simply enable you to better enjoy the fruits of your labor. Now all that is left is to do some research and make the call.

Images from depositphotos.com.

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