With images of stampeding brokers hollering across a trading floor and a barrage of terms like IPO, bid-ask and liquidation, it’s easy to feel overwhelmed by the stock market. Despite all the noise, though, the stock market is based on a handful of easy-to-understand concepts. The most foundational is that companies sell stock, or partial ownership in the company, to investors in order to raise money.
Investing in the stock market is one of the most popular methods of building wealth and saving for retirement. While you don’t need to be poring over market data for hours every week to succeed, having some fundamental knowledge can help you better understand the risks involved and how to mitigate them as best you can.
What Is the Stock Market?
The stock market lets companies raise money and investors make money. When a company decides to issue shares to investors, it’s offering partial ownership in the company. In exchange, for investor dollars. Issuing shares helps companies raise money and spread risk. Instead of finding investors one by one, companies who qualify and register offer their shares in a stock exchange. This offering is known as an Initial Public Offering (IPO), also called “going public.” An IPO creates a primary market for the company’s shares.
In the secondary market, investors buy and sell shares on a stock exchange like the New York Stock Exchange (NYSE) or the Nasdaq. Investors in stocks could be large entities like commercial banks, or they could be individuals just like you. You don’t buy the shares from the issuing company, you buy them from someone who already owns them. Most major stock exchanges engage in trading from 9:30 am to 4 pm, known as trading hours. While trading does occasionally take place outside these hours, you’ll want to plan on making any sales or purchases during trading hours.
How Stock Prices Move
The price of a stock fluctuates according to supply and demand, investor confidence, world events and information about company profits, among other factors. Since there are only so many shares of a stock on the market at a give time, the price will rise if there are more buyers trying to get it than sellers hawking it. The reverse is also true; if there are more sellers than buyers, sellers will lower their prices to account for that.
With all the variables in play, it’s notoriously hard to know which stocks are on the rise. It’s a good idea to be suspicious of any “hot tips” or guarantees of astronomical returns. If it sounds too good to be true, it probably is.
Understanding the Stock Market: How to Invest
If you want to get in on what the stock market has to offer, you don’t have to travel to New York, put on a funny-looking blazer and start yelling “buy! sell!” You just need a broker to act as your representative. This could be a person you hire, but more likely you can just open a brokerage account with a large, retail broker like Fidelity, TD Ameritrade or Schwab. The internet has made this process much simpler. You don’t have to be rich to start investing – but it’s important to look for low-fee options. Fees eat into your gains and can cost you tens of thousands of dollars over the years you invest.
What’s on a Stock Ticker?
A stock ticker shows the price and trading volume of various stocks. It updates throughout the day during trading hours, showing “ticks” (changes) in stock prices and trading volume. Not all of the companies whose shares are traded on a given market appear on the ticker.
Stock tickers list companies by their symbol. Unless you know the symbol of the company you’re interested, you’ll have to look it up before you consult a stock ticker. Then, you’ll see the stock symbol, the number of shares trading and the price. You’ll see a green upward arrow if the price is higher than the day before. You’ll see a red downward arrow if the price is lower. You can also see the difference between the current price and the price at the end of the previous day.
If you’re an average retail investor, you don’t need to spend your day glued to the stock ticker. It’s probably information overload. But now you’ll know what you’re looking at next time you’re watching television and see a stock ticker moving across the bottom of the screen.
Stockholder’s Equity: Why You Want It
So why buy stocks when you could just stash cash under the mattress, buy CDs and bonds or keep your savings in jewelry and fine art? I’m glad you asked. Investing in the stock market generally provides higher returns than investing in bonds or CDs. And you don’t have to figure out how to store and insure stocks, like you would with jewelry or art.
Stocks do come with some risk, though. If the stocks you own become less valuable, your net worth goes down. Bummer, right? It sounds counter-intuitive, but experts advise the way to ride out the ups and downs of the stock market is to buy low and sell high, or buy and hold. If you panic in a downturn and “sell low,” and then you only “buy high” after stocks have become expensive, you’ll miss out on opportunities to increase your net worth.
The good news is that there is a way to remove the temptation to try to “beat the market” by timing your investments and hand-picking stocks. If you think you’ll be tempted in this way, it’s probably a good idea to steer clear of individual stocks and online stock-trading sites. Instead, consider low-cost index funds that track the market and stay strong in a downturn. Experts agree: offloading your shares when times get tough is not a winning strategy.
If you’re looking to grow your retirement savings, you’d likely be well served to invest in the stock market. Conventional wisdom says that when you’re younger and further from needing to live off your investments, you can afford to have a high percentage of your investments in the stock market. Later, as you approach retirement, you’re more vulnerable to a market downturn that could wipe out your retirement savings right before you need them. That’s why experts typically advise folks who are closer to retirement to decrease their exposure to equity risk by reducing the percentage of their investments in stocks and increasing the percentage in bonds.
If all that rebalancing sounds like too much to take on, there are target date funds that re-balance for you according to the year you intend to retire. You tell them when you want to retire and they chase higher returns (with more risk) while you’re young, preserving those gains with a lower-risk portfolio as you near the end of your career.
Whichever investing strategy you choose, it’s important to go into it with your eyes open. Starting from a place of knowledge will likely improve your returns, and it will make you less vulnerable to fraud. Happy investing!
- If you’ve decided you want to start investing, the first thing you’ll want to figure out is how much you want to invest, how much risk you can take on and how long your time horizon is. All of this will inform how you allocate your assets. Remember, diversification is key.
- Talk to a financial advisor. Especially if you’re focused on meeting a goal like getting retirement ready, a financial advisor can help you make the right financial decisions to get there. A matching tool like SmartAsset’s can help you find an advisor to work with who meets your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to up to three registered investment advisors who suit your needs.
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