There was a time when investing in the stock market was reserved for the wealthy. These days, there are a number of discount brokerage firms such as Sharebuilder and E*Trade that make investing easy for everyone. Investing sites such as these make it possible to invest in the stock market online for very little money and with relatively small fees. Now anyone can invest their money and possibly increase their wealth from the comfort of their own homes.
How Investing Works
Let's say company XYZ is valued at $1,500,000. Last year, the company's profits were $100,000 and the company stands to make at least that amount, if not more, this year. The owner considered selling his company but has decided to sell shares, or pieces of ownership, instead. He sells 1500 shares for $1000 each. He still owns his company, he has $1,500,000 in the bank, and he divides the profits, called dividends, among the shareholders at the end of the year.
As a private company, the owner can sell shares through an advertisement in the newspaper or by word of mouth or he can also sell the shares publicly through a stock market or stock exchange. The New York Stock Exchange (NYSE) is one of the most widely known- millions of shares of companies are bought and sold there daily. Not everyone can travel to New York to buy and sell their stocks so instead they use the services of a stockbroker.
Buying and Selling Stocks
Because transactions through the stock exchange can only be conducted by a member, anyone who is not a member and wishes to purchase or sell stocks must go through a stockbroker. A stockbroker is an agent who works for a brokerage firm and does the buying and selling of stocks for investors and charges a fee for doing so.
There are several websites to go to that show stock exchange rates. Dow Jones Industrial, NASDAQ, MSN's Money Central, Yahoo! Finance- any of these can be used to track stocks, but there are others. Just type "stock quotes" or something similar into a search engine and a list of sites will be displayed.
How to Buy and Sell Stocks
When deciding on what stocks to buy, there are several considerations to keep in mind.
- Research- Doing some research beforehand is a good idea and may help reduce some of the risk involved by determining which stocks are more volatile (sharp price fluctuations) than others.
- Buy Low, Sell High- The stock market is always going to rise (a bull market) and fall (a bear market) due to supply and demand. No one wants to sell stock at a loss unless there are mitigating circumstances. A good stockbroker can help make informed decisions in such cases. The idea is to minimize risk while maximizing the potential for profits. Remember that profits are income and subject to taxation.
- Diversified Portfolio- Simply put, no one should ever put all of their eggs in one basket. The price of stocks rise and fall independently, therefore anyone who has all of their money tied up in one or two stocks is more likely to lose a lot more if one of those stocks falls dramatically than they would if they owned, say, stock in ten different companies. That way if stock in one company falls, the loss would be a smaller portion of the total portfolio.
Above all, don't panic. Stocks that realize the biggest gains can also realize the biggest losses. The trick is to ride it out- for the most part, investing is a long-term process. With a small amount of money and a sound investing strategy, it's easy, and potentially profitable, to play today's stock market.
Sources:
www.Money.howstuffworks.com, "How Stocks and the Stock Market Work." (accessed Aug. 14, 2010)
www.Princetonreview.com, "A Day in the Life of a Stockbroker." (accessed Aug. 14, 2010)
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