SAVE & INVEST

Intro to the Stock Market 

Posted June 2016. 

Unless you’re a finance major, or come from a home (or high school) where financial investing was discussed (or taught), you might know nothing about the stock market -- except that other people seem to know about it.  And, if you’re like many people, your eyes glaze over when you hear stock market news.  It can seem like a steep climb to get knowledgeable about the stock market.  And we’re not here to say you need to be an expert—but we are here to say, you can actually make a little stock market knowledge go a long way.    

Despite economic ups and downs, the stock market remains an important tool for Americans to build wealth.  But it has risks, and you can gain or lose money in the stock market.  Will you actually be an investor though?  Well, according to Gallup, over half of adults invest in the stock market.  And if you get a job, you may have money invested in stocks for you, under your employer’s retirement plan.  Since you’re very likely to participate in the stock market at some point, it pays to know something about it.  Here are some stock market basics every investor should know. 

What is the stock market?  Simply put, the stock market is where ownership in companies is bought and sold – this is also called trading. When you buy stock – also known as shares — in a company, you’re buying a piece of that company, and that makes you a shareholder. When you hear talk about “equities,” remember that’s just another word for stocks. The “stock market” is, however, a general term. Companies actually list their stock on one of several different stock exchanges, such as the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX) and the National Association of Securities Dealers Quotation System, which is commonly referred to as the NASDAQ. 

How do you make money in the stock market?  There are two basic ways to make money in the stock market. The first is to buy a stock, and then sell it after it increases in value – the profit you make is referred to as a capital gain. The other way to make money is to buy a stock that pays dividends to shareholders; dividends are a company’s earnings, which it pays out to its owners. Companies that pay dividends are often older or well-established firms. Often, newer companies aren’t yet making enough money to issue dividends because they’re reinvesting their earnings back into the company. 

What’s the difference between a stock and bond?  Stocks are ownership investments – you’re buying a piece of a company. Bonds, on the other hand, are a lending investment. You give the bond issuer money, and they pay you interest in return, just like you pay interest to a creditor. In general, bonds are considered safer than stocks since the bond issuer has a legal obligation to pay them. They are not, however, risk-free. 

What is diversification, and why is it important?  Diversification simply refers to the practice of spreading your money among a variety of investments to balance risk. It’s important because nobody can know for sure exactly how different types of investments will perform at any given time. A diversified investment portfolio has lower risk because if one type of investment is down, it can be balanced by others that may be doing better. 

What is a mutual fund?  A mutual fund is a collection of stocks or bonds, in which investors pool their money. Mutual funds can be a great way for smaller investors, and those who don’t have the time or expertise to research and purchase individual stocks and bonds, to diversify their investments. Shares in a mutual fund are purchased in the same way that individual stocks are purchased. 

When you want to try investing, start simply and purchase just a few shares you can afford in a mutual fund or stock.  Through apps and websites, you can begin to watch how the value changes over a period of time.  You may eventually consider investing more on your own, or seek help from experts if you feel more comfortable.  With some basic knowledge about the stock market in mind, you’ll start to understand a little more about your money – and maybe even how to make more of it long-term.  A core purpose of investing is “making your money work for you,” to build wealth throughout your lifetime.