We all start somewhere, and every successful investor was once a beginner. Whether you’re aiming for long-term wealth creation, financial independence, or simply a better understanding of how the stock market operates, you’re at the right place.
In this beginner’s guide to the stock market, we’ll explore key concepts, provide practical tips, and help you navigate this dynamic landscape with confidence.
What Is the Stock Market?
The term “stock market” refers to several exchanges in which individuals and institutions buy and sell securities like stocks and bonds. These financial activities are conducted through formal exchanges – like the New York Stock Exchange (NYSE) and the NASDAQ – and over-the-counter (OTC) marketplaces that operate under a defined set of regulations. The stock market provides individuals with easy, transparent access to investment assets, and it helps professional investors determine fair prices for publicly traded companies.
A stock market is a regulated and controlled environment. In the United States, the main regulators include the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
How Does the Stock Market Work?
Stock markets provide a secure and regulated environment where market participants can transact in shares and other eligible financial instruments with confidence. The stock markets act as primary markets and secondary markets.
As a primary market, the stock market allows companies to issue and sell their shares to the public for the first time through the process of an initial public offering (IPO) – the process by which a private company becomes publicly traded and listed on a stock exchange. This activity helps companies raise necessary capital from investors.
A company divides itself into several shares and sells some of those shares to the public at a price per share. To facilitate this process, a company utilizes a marketplace (like NYSE or NASDAQ). A company can also offer new, additional shares through other offerings at a later date.
Investor Benefit: Investors own shares of a stock in the expectation that share value will rise, or that they will receive dividend payments, or both.
Company Benefit: By listing shares for sale on stock exchanges, companies get access to the capital they need to operate and expand their businesses without having to take on debt.
The stock exchange acts as a facilitator for this capital-raising process and receives a fee for its services from both the company and its financial partners.
Using the stock exchanges, investors can also buy and sell securities they already own in what is called the secondary market. The stock exchange also earns a fee for every trade that occurs on its platform during secondary market activity.
The stock market ensures price transparency, liquidity, price discovery and fair dealings in trading activity.
Stock Market Indicators
The stock market maintains various market-level and sector-specific indicators, which reflect investor confidence and thus, may be indicators of the health of the overall economy. Most notably:
The S&P 500 Index
The S&P 500 Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is regarded as one of the best gauges of prominent American equities’ performance.
The NASDAQ 100 Index
The NASDAQ 100 Index is a basket of the 100 largest, most actively traded non-financial U.S. companies listed on the NASDAQ stock exchange, based on market capitalization.
The Dow Jones Industrial Average (DIJA)
The Dow Jones Industrial Average (DIJA) is a stock market index that tracks 30 large, publicly-owned blue-chip companies trading on the NYSE and NASDAQ.
How to Invest in the Stock Market
If you want to invest in the stock market, follow these steps:
1. Define Your Tolerance for Risk
Risk tolerance is the amount of market volatility and loss you’re willing to accept as an investor. Determining your personal risk tolerance is perhaps the most fundamental step you can take in deciding what types of investments to make.
Stocks are categorized in various ways – large capitalization stocks, small capitalization stocks, aggressive growth stocks, value stocks – and each has a different level of risk. Once you determine your risk tolerance, you can set your investment sights on the stocks that compliment it.
Related: Growth vs. Value Stock Investing
2. Determine Your Investment Goals
Next, you should determine your investment goals – what’s important to you?
If you’re just beginning your career, an investment goal may be to increase the amount of money in your account. If you’re older, you may want to generate income as well as grow and protect your wealth.
Other investment goals include funding your retirement, buying a house, saving for college tuition and related costs, and so on… Goals change over time, so you should define and review them periodically.
3. Determine Your Investing Style
Some investors want to play an active role in managing their investments, while others opt for the set it and forget it approach.
A financial advisor can help you make investment decisions, monitor your portfolio, and make changes to it. This is a good option for beginners who want to lean on an expert to help them out. However, even experienced investors would benefit from the knowledge, objectivity, and comprehensive services provided by a trusted financial advisor.
That said, if you are confident about your investing knowledge and capability, you could manage your investment portfolio on your own. Traditional online brokers allow you to invest in stocks, bonds, exchange-traded funds, index funds and mutual funds.
4. Decide What Kind of Account You Want to Open
Once you decide what kind of account you want, you’ll like open an account at a provider called a brokerage. When choosing a brokerage firm, consider their fees and available investment options.
5. Deposit Money
To start investing, you’ll need to make an initial deposit. You can also opt to set up recurring deposits to automate your investments.
6. Choose Your Investments
Once your account is open, you can buy and sell securities. You can opt for individual stocks and bonds or mutual funds, or index funds and exchange-traded funds (ETFs) that contain hundreds of individual securities. Many experts recommend a diversified approach to minimize risk.
If you’re just starting out as an investor, it’s possible to invest in stocks with a relatively small amount of money. While you should do your homework to determine your risk tolerance, investment goals and investing style – which will inform what investments fit your needs – once you get started, you will reap the benefits of investing young.
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