What is the Stock Market and How Does it Work?
In this Investing for Dummies guide, we will teach you about what the Stock Market is. In simple terms, it’s where people buy and sell pieces of companies called “stocks.” These stocks let you own a small part of a company and share in its success. Making you passive income (which is money that you make without working for it, it makes money over time with investments), which is how people are able to retire before the age of 62. When YOU decide!
Here’s the basics:
- Companies sell stocks or shares to raise money.
- Investors (like you!) buy them to grow their money.
- The price of stocks goes up or down based on how many people want to buy or sell them. Certain stocks are very stable over time, these are called Blue Chip Stocks we will talk about these below.
Easy Tools to Get Started:
- Robinhood: A beginner-friendly app with commission-free trades. Sign up and get a free stock!
- eToro: This lets you copy the moves of successful investors. You don’t have to do the hard work. This way, you can let others that are more experienced handle the research.
Why Invest in the Stock Market?
Investing in the stock market is a smart way to grow your money. Here’s why:
- Your money grows faster: The average return is about 7% a year.
- It beats inflation: Stocks grow faster than rising prices. In this economy, we know how high Inflation has gotten, just to put this into a new way to see it.
Example: If you invest $100 a month in a fund like SPDR S&P 500 ETF (SPY), it could grow to over $120,000 in 30 years! The main important thing here is consistency, keeping at it over a long time, which also requires discipline.
Top Tools for Easy Investing:
- Acorns: Automatically invests your spare change. Start with just $5! So if your total is $4.87 Acorns will invest the rest of the .13 cents to make it an even $5.
- Betterment: Manages your money for you in different funds. This is good to not put all your eggs in one basket.
Steps to Start Investing in the Stock Market
- Set a Goal
What are you saving for? Retirement? A house? Pick a goal to stay focused. Make sure to write your goals down this helps keep you on track, and if you need to readjust your goals, you’ll be able to switch them if need be. - Pick a Broker (the Place to Buy Stocks)
Choose a company that’s easy to use and doesn’t charge a lot of fees. Do your research and make sure they are able to be trusted. If they charge a fee for everything, especially when you’re starting we wouldn’t recommend it.
Best Broker Options:
- Fidelity: Great for learning with tons of free tools. When starting this could be very beneficial!
- Webull: Perfect for those who like advanced charts and data. If you like to dig deep into the stocks and it’s history this would be perfect for you!
- Start Small
You don’t need a lot of money to begin. Apps like Stash let you invest as little as $1. Don’t let the excuses pile up over time, it’s just more money lost! Reclaim your lost money and take control of your future money as well.
Smart Strategies for Beginners
1. Spread Your Money Around (Diversify)
Don’t put all your money into one stock. Spread it out using funds like the Vanguard Total Stock Market ETF (VTI) to invest in lots of companies at once. This will help you if one area falls temporarily.
2. Invest Regularly
Put in the same amount of money every month, no matter what the market is doing. Apps like Acorns can do this for you automatically. Set it for payday, always pay yourself first and others after.
3. Do Your Homework
Learn about companies before buying their stocks. Subscriptions like Morningstar Premium give you easy-to-understand research. Try to see how far out their data goes and see if it’s on the rise, stable or going in decline.
Mistakes to Avoid for Investing for Dummies
- Panicking When Prices Drop
Times will get hard but these can also be beneficial depending how you see it. Stocks go up and down. Don’t sell just because prices drop—it’s part of the process. You selling might mean you handed your profit to someone else. - Overtrading
Buying and selling too much can cost you in fees and missed gains. Use low-fee options like M1 Finance to keep more money in your pocket. Fees will add up overtime so try to be smart with your money moves. - Ignoring Fees
Fees can eat into your profits. Pick platforms like Public.com that don’t charge commissions. As mentioned above they will eat away at your ROI (return on Investment) which is the main point of investing.
Best Tools to Make Investing Simple
- Mint: Helps you track your money in one place.
- Empower (formerly Personal Capital): Shows how your investments are performing.
- Stash: Lets beginners start with small amounts and teaches you as you go.
How to Pick Good Stocks
- Check Their Numbers
Look at profits, sales, and debt. Healthy companies usually perform better. See how far back you can go. - Understand the Industry
Are you buying into a growing sector like technology or renewable energy? Do your research on the company and its industry. A company may be doing well, but the industry could be struggling. This means the company’s future might not look good. - Use Helpful Tools
Try Yahoo Finance Premium or Zacks Investment Research for easy analysis.
Advanced Tips to Grow Faster
- Use Funds
ETFs like the iShares Core MSCI Total International Stock ETF (IXUS) are great for spreading your money globally. Allowing you to not be tied down to certain areas, we recommend this if you know the area you want to invest in . - Rebalance
Over time, your investments may get off track. Tools like Betterment adjust them automatically. So you can just invest and relax, we do still recommend you check in to see how they are performing. Never get complacent! - Be Tax Smart
Invest in accounts like a Roth IRA to save on taxes. Need help? Use H&R Block during tax season. They will help you get the best on your returns, make sure to have your receipts.
For more in-depth Financial Articles on Topics like this one, check out our latest articles from our Financial Success Today Blog.
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