Deciding to invest money in the stock market can be a scary proposition. After all, it can feel like you need to learn an entirely new language to understand what is going on. And then there is the question of risk. Anyone who watches the news even occasionally knows that the stock market is usually very volatile, with prices of stocks rising and falling suddenly and unpredictably.
But with a little bit of knowledge to demystify the process, responsible investing in stocks can be an interesting, fun and lucrative way to make some money. So what do you need to know about buying your first stock?
What is a Share of Stock?
A share of stock represents a tiny fraction of ownership in a company. To raise money, some businesses (called publicly traded companies) sell shares of ownership to anyone who wishes to buy them. The value of these shares fluctuates daily -- or even hourly -- with the fortunes of the company and the general state of the economy. The goal for investors in the stock market is to select stocks that have a good likelihood of rising in value over time.
How do You Pick Which Stocks to Buy?
In the world of investing, figuring out which stocks to buy is the million-dollar question. Trying to predict which stocks are going to rise in value is extremely difficult, even for professional stock brokers and money managers.
Factors that affect value include such things as a company’s earnings, growth and losses, the economy, the political climate and even the weather. You can do research about companies that interest you to see what the experts are saying about their outlook. If there is a particular industry that you think has growth potential, look for newer companies in that industry and you might be able to get a bargain.
Remember, if a company is already doing well, the price of a share of its stock is likely to be high.
How Do You Know When to Sell Your Stock?
Stocks are generally meant to be long-term investments. Some experts even recommend holding a stock for at least 15 years to make money from it. This amount of time may seem extensive, but history has shown that the overall value of the stock market will rise over time, even if it suffers periodic drops in value.
You may have heard of the Dow Jones Average, the Nasdaq index or the S&P 500. These are indexes of specifically selected stocks whose performances are carefully watched by financial experts as an indication of the health of the stock market in general. When these indexes rise and stay high, we say we are in a “bull market.” When the numbers drop for a long period of time, it is called a “bear market.”
The goal is to buy stock when the price is low and sell it when the price is high so you earn a profit.
Where Do You Buy Stocks?
As recently as twenty years ago, most people had to contact a professional stock broker to buy or sell stock. Today, thanks to the Internet, anyone with a computer can buy or sell stocks right from their home.
There are many websites that will, for a fee, place orders for shares of stock, sell shares of stock you own and track the value of your entire portfolio. Each website has its own rules and regulations, so be familiar with them before you get started.
The more knowledgeable you are, the more comfortable you will hopefully be with the entire process.
And finally, know how much you can afford to spend (and lose) in the stock market and stick to that amount.