Stashing your money away in a traditional savings account is a good way to build a good “just in case” fund, but it won’t give your money the chance to work double duty and multiply. One way to help your money grow over time is by investing in the stock market.
Hear us out – investing in the stock market might sound scary if you’ve never done it before, but it can also be one of the best ways to put your money to work for you. Here’s an overview of everything you need to know about stocks and how to start investing.
What are shares?
Shares are assets that represent ownership in a company.
Companies issue stocks as a way for investors to own shares in their company. In turn, these companies raise additional capital from selling shares to finance key projects or expand the business.
As the value of the company increases, so does the value of a shareholder’s stock, allowing the investor to build wealth as their investment portfolio grows. But it is not always so problem-free. You can expect plenty of ups and downs when investing in the stock market.
“U.S. stocks, as represented by the S&P 500 index, have produced a historical average annual return of about 11.88% since its inception in 1957 through the end of 2021,” said Kevin Mahn, president and chief investment officer at Hennion & Walsh Asset Management . “However, these returns have not been consistent and have been accompanied by different levels of risk consistent with different economic and stock market cycles.”
Understand how stocks work
Shares are bought and sold on exchanges that act as intermediaries between investors and companies. Stock exchanges facilitate transactions through which investors can buy and sell stocks, bonds, commodities and other assets.
In the United States, the two major stock exchanges are the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations, also known as NASDAQ.
When choosing where to invest their money, investors will buy shares in a company that they believe will be successful. “[Stocks] give [investors] an alternative and fruitful way to support and benefit from public organizations they believe in,” says Michael Wang, CEO and founder of Prometheus Alternative Investments. “For some, that means investing in shares of companies that align with their beliefs, such as strong ESG [environmental, social, and governance] effort or a specific matter the company is working on.”
When a company does well, investors will receive profits in the form of dividends or capital gains. Dividends are periodic payments that the company pays to shareholders when it earns a profit. Capital gains are any profit that the shareholder makes by selling their shares at a higher price than they originally bought them for.
What are the different types of shares?
Not all stocks are built equal. They typically fall into one of two categories: common stock and preferred stock. They work the same way, but there are a few small differences between the two:
- Vote: Common stockholders have the right to vote on matters related to company policies, board decisions, mergers, acquisitions and more. Preferred shareholders usually do not get the same rights.
- Yield: Both types of stock pay dividends, but preferred stock typically pays shareholders a fixed dividend, while common stock fluctuates. And if the company files for bankruptcy, preferred stockholders are paid higher dividends and paid before common stockholders.
How do I buy shares?
The easiest way to invest in stocks is through an online brokerage account. This is an account offered by investment companies that you can put money into and use to start buying assets and building your portfolio.
Opening an account requires you to provide some personal information, such as: your CPR number, name, address, phone number, driver’s license number and other identifying information. Along with that, you may be asked to answer some questions about your income, employment status, investment goals and risk tolerance.
A few of the most important factors to consider when choosing a brokerage account:
- Fees: Each brokerage account comes with a fee structure. You may be charged fees for receiving bank statements, processing transactions, account maintenance, inactivity fees and more. So before you sign up for an account, you should spend some time reviewing these fees and comparing them to other brokerage accounts to determine which options will benefit you the most at the lowest cost.
- Account minimum: Some accounts are free to open and others require a minimum deposit in the thousands. Consider how much you are ready to invest before choosing an account.
- Investment Style: Being a more active or passive investor can determine which brokerage is right for you. Some brokerages will offer services in person or over the phone with a broker who can build, diversify and maintain your portfolio for you based on your investment goals and risk tolerance. However, these more personalized services may cost you more in fees. If you want to take a more hands-off approach, consider letting a robo-advisor automatically build and manage your portfolio. Others will let you be in the driver’s seat and manage your own account and may be more affordable as a result.
“Investors should consider a wide range of factors, including, but not limited to, the company’s history, the advisers’ experience, the technology and reporting infrastructure, the company’s commitment to customer service, the types of products and solutions available, insurance coverage and the firm’s fee structure,” says Mahn.
Once you’ve opened and funded your account, research the companies you’re considering investing in.
“That’s the key to looking at the fundamentals of a business [like] growth in revenue and earnings,” says Wang. “The management team’s track record and credibility, and assess whether the company is an attractive buy at the current valuation.”
Once you’ve decided where you want to put your money, you place a stock order. This tells your brokerage what you want to invest in, how many shares you want to buy, and at what price. Some orders are executed immediately, others take a little longer depending on whether you are waiting for a stock to hit a certain price before the order goes through.
There are alternative routes you can take to invest in stocks. One way is to buy shares directly from a company, without using a broker, through a direct share plan (DSP). This reduces some of the costs you may incur using a broker, but may require you to be employed by the company or already own shares in that company.
There are several ways to invest in stocks, and you don’t need to save a certain amount of money before you can put your money into the market. But understanding how stocks work and the investment options available to you is key.
“Stocks can be used to help meet a given investor’s growth or even income goals in the case of dividend-paying stocks,” says Mahn. “However, investing in stocks comes with unique risks that should be reviewed and understood before considering any investments.”
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