Learning how to get started in stock investing does not have to be complicated or intimidating. Anyone can learn how to invest in the stock market with some knowledge of how markets work, the types of stocks there are, and the best strategies to use. Armed with this information, you'll be ready to jump in to the world of trading with both feet.
What are Stocks?
Stocks are essentially a share of a company. When you buy stocks, you own a part of the company you are buying from. Companies sell stocks in order to raise money that they need for research, development, and expansion. If the company does well in business and profits, a part of the profits will go to you through annual dividends or through the sale of the stocks that you own.
What is the Stock Market?
The stock market is where stocks are bought and sold. It's not an actual location. In short, the stock market is the business where the trading happens.
Another term for the stock market is the stock exchange. The largest stock exchanges are NYSE (New York Stock Exchange), AMEX (American Stock Exchange), and NASDAQ (National Association of Securities Dealers).
On the news, they tend to talk about the Dow Jones Industrial Average, the S & P 500, and the NASDAQ Composite Index. They all are just general market averages to give the public a basic understanding of how well the economy and companies are doing.
The average return of the market is about 8 percent a year, which is a good return. However, this is the average return of the entire stock market – your investment might have a higher or lower return dependent on how well the company does in a given year.
The Different Kinds of Stock
Generally, stocks are grouped in three different ways: by size, by style, or by sector. When grouping stocks by size, we refer to them as large-cap, mid-cap, or small-cap. Large-cap stocks are sold by large companies with a market cap of over five billion. Mid-cap stocks are sold by mid-sized companies that have a market value of 1 to 5 billion. Small-cap stocks are sold by companies that have a market value of less than 1 billion. Although small-cap stocks give you more potential for profit, they are riskier than large-cap or mid-cap stocks. It all depends on the risks that you're willing to take.
Stocks can be grouped by style – growth and value stocks. Growth stocks are those that are expected to rise in value higher and faster than the whole market (higher than 8 percent return). Value stocks are stocks that are at lower prices than they should be, due due to company problems or bad public relations. Some investors like to invest in value stocks in order to "buy low and sell high."
Lastly, grouping them by sector means to separate stocks into categories depending on the industry that they're in – eg, technology and health care.
A common low-risk strategy for investing in stocks is to buy low and sell high. You'll see better results if you employ a lot of patience and keep a cool head during dips in the market. There are two ways to do this – by investing in a value stock and holding it on for a long time until prices rise, or investing in an established company and not selling your stocks for a long time.
Another important strategy to use when you're learning about investing the stock market is to diversify. None of the different types of stocks will perform the same in a given year. They all go up and down at different times – during one year, some will rise and others will fall. If you invest all of your money in only one type and then they do not do well, you lose a lot of money and it'll be hard to recoup your losses. Instead, if you spread your investments into different types, you might lose some money on certain kinds but you'll still see profits in other kinds.
Why You Should Invest in Stocks
Money that's sitting in the bank is not doing you any favors. Actually, you lose money when you leave your money in a bank account, even a high-interest savings account. Inflation will catch up to your money. With some practice and experience, along with smart decisions such as diversifying and taking the slow approach to buying and selling, soon enough you'll be seeing profits from your investments.