Store your money in a traditional savings account is a good way to build a nice “just in case” fund, but it won’t give your money the chance to work twice and multiply. One way to help your money grow over time is to invest in the stock market.
Listen to us—invest in the stock market might seem daunting if you’ve never done it before, but it can also be one of the best ways to make your money work for you. Here’s an overview of everything you need to know about stocks and how you can start investing.
What are stocks?
Stocks are assets that represent ownership of a company.
Companies issue shares to allow investors to own shares in their company. In return, these companies raise additional capital by selling shares to fund key projects or expand the business.
When the value of the company increases, the value of a shareholder’s shares also increases, giving the investor the opportunity to build wealth as their investment portfolio grows. But it’s not always so smooth. You can expect a lot of ups and downs when investing in the stock market.
“U.S. equities, as represented by the S&P 500 Index, have generated a historical average annualized return of approximately 11.88% from their inception in 1957 through the end of 2021,” said Kevin Mahn, Chairman and Chief Executive Officer. investments at Hennion & Walsh Asset Management. “However, these returns have not been consistent and have come with different levels of risk depending on different economic and market cycles.”
Understand how actions work
Stocks are bought and sold on stock exchanges, which serve as an intermediary between investors and companies. Stock exchanges facilitate transactions through which investors can buy and sell stocks, bonds, commodities and other assets.
In the United States, the two major stock exchanges are the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations, also known as the NASDAQ.
When choosing where to invest their money, investors will buy shares of a company that they believe will be successful. “[Stocks] give [investors] an alternative and successful way to support and benefit from the public organizations they believe in,” says Michael Wang, CEO and Founder of Prometheus Alternative Investments. “For some, that means investing in stocks of companies that match their beliefs, such as strong ESGs [environmental, social, and governance] efforts, or a specific cause the company is working with.
When a company is doing well, investors will receive profits in the form of dividends or capital gains. Dividends are periodic payments that the company pays to shareholders when it makes a profit. Capital gains are any profits the shareholder derives from selling their shares at a higher price than they originally bought them.
What are the different types of shares?
Not all stocks are built the same. They generally fall into one of two categories: common stock and preferred stock. They work the same way, but there are a few small differences between the two:
- Right to vote: Common stockholders have the right to vote on matters related to corporate policies, board decisions, mergers, acquisitions, etc. Preferred shareholders generally do not have the same rights.
- Dividends: Both types of stocks pay dividends, however, preferred stocks generally pay shareholders fixed dividends, while common stocks fluctuate. And, if the company files for bankruptcy, preferred shareholders receive higher dividends and are paid before common shareholders.
How to buy shares?
The easiest way to invest in stocks is to open an online brokerage account. This is an account offered by investment companies that you can invest in and use to start buying assets and building your portfolio.
Opening an account will require you to provide certain personal information, such as: your social security number, name, address, phone number, driver’s license number, and other identifying information. Along with this, you may be asked to answer certain questions about your income, employment status, investment goals and risk tolerance.
Some of the main factors to consider when choosing a brokerage account:
- Costs: Each brokerage account comes with a fee structure. You may be charged fees for receiving account statements, processing transactions, maintaining the account, inactivity fees, etc. So, before creating an account, you should spend some time reviewing these fees and comparing them to other brokerage accounts to determine which options will benefit you the most at the lowest cost.
- Account minimums: Some accounts are free to open, and others require a minimum opening deposit in the thousands. Consider how much you are willing to invest before choosing an account.
- Investment style: Being a more active or passive investor could determine which brokerage is best for you. Some brokerages offer in-person or over-the-phone services with a broker who can build, diversify, and maintain your portfolio for you based on your investment goals and risk tolerance. However, these more personalized services might cost you more in fees. If you’re looking to take a more passive approach, you might want to consider having a robo-advisor automatically build and manage your portfolio. Others will allow you to sit in the driver’s seat and manage your own account and therefore may be more affordable.
“Investors should consider a wide variety of factors, including but not limited to company history, advisor experience, reporting technology and infrastructure, of the company towards customer service, the types of products and solutions available, the insurance coverages and the pricing structure of the company,” says Mahn.
After opening and funding your account, you will need to research the companies you are considering investing in.
“It is essential to look at the fundamentals of a business [like] revenue and profit growth,” says Wang. “The track record and reliability of the management team, and assess whether the company is an attractive buy at the current valuation.”
Once you have decided where you want to put your money, you will place a buy order. This tells your brokerage what you want to invest in, how many shares you want to buy, and at what price. Some orders are executed immediately, others take a bit longer depending on whether or not you wait for a stock to reach a certain price before the order goes through.
There are alternative avenues you can take to invest in stocks. One way is to buy shares directly from a company, without using a broker, through a direct share plan (DSP). This reduces some of the costs you might incur by using a broker, but may require you to be employed by the company or already own stock in that company.
There are many ways to invest in stocks, and you don’t need to save a certain amount of money before you can put your money in the market. But understanding how stocks work and the investment options available to you is essential.
“Stocks can be used to help achieve a given investor’s growth or even income goals in the case of dividend-paying stocks,” says Mahn. “However, investing in stocks carries unique risks that should be considered and understood before considering any investment.”
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