If you have been putting your extra cash into a savings account at a bank, you have probably noticed that your balance is not growing very quickly.
This should not be a surprise; as long as you keep your money in a low interest savings account, it is never going to amount to much more than you put in.
If you want your money to grow, you need to invest it. And for many new investors, that means buying some stock. But what exactly is a stock?
Overview of Stocks
In order to raise money, businesses sometimes sell shares of the company to investors, who pay a certain amount of money for each one. Each share of “stock” represents a tiny piece of ownership in the company. If the company does well and the value of the shares rises, investors can make money by selling them. Of course, if the value of the stock falls, then investors will lose money if they sell their stock at that time. While it can be fun to buy only a share or two of stock in a company you like, most investors buy hundreds or even thousands of shares of stock in a number of different companies.
Although each share of stock represents ownership, very few investors own enough stock in any particular company to be able to influence the company’s actions. Individual share-holders do have the right to speak at the company’s annual meeting and can vote on issues that are brought before all of the owners.
A stock portfolio refers to all the different companies in which an investor owns stock. Some investors choose to buy stocks in a particular industry, such as alternative energy or telecommunications. Others select their stocks by carefully researching numerous companies and trying to predict which ones are likely to do well in the future, thus raising the value of the stock.
Another way to buy a number of different stocks in a particular industry or type of market is to buy shares of a “mutual fund,” which is a portfolio that is created by a professional money manager. A mutual fund is made up of dozens of different stocks (or more) that all have something in common, such as being from companies that are all located in a particular region of the world. Buying a mutual fund is a less risky way to invest your money in the stock market because if one of the stocks in the mutual fund drops in value, there are still many others that may gain.
Of course, there is no magic formula for determining which stock values are going to rise and which are going to fall. Generally, you need to hold onto a stock for a while -- several years or more -- to make money. If you own many shares of a particular stock, you can choose to sell some of them when their value rises and hold onto the rest in the hope that their price will later rise even higher.
The Stock Market
Shares of stock are bought and sold, or traded, in the stock market. The stock market has very specific hours of operation, and many rules regulating its operation. This is because the price of a company’s stock is tied to the company’s performance, which could give insiders who have non-public information about the company’s earnings or business plans an unfair advantage when it comes to buying or selling their shares of stock.