Most people see the stock market as a game of chance full of strange terms, confusing “instruments” and unknown rules. It can be scary if you don’t know anything about it, but it’s easy to learn. Once you’ve mastered the basics and talked to experienced professionals, you’ll find it’s a great place to let your savings grow and to prepare for your financial future.
Begin by restricting your spending, budgeting your money and saving. It’s easy to spend money but the only way to save is to “pay” your savings account first. Even small amounts add up over time. Decide what you’re saving for—a goal will keep you motivated.
Now you’re ready to take the investment plunge. Read on for all the essentials about stocks, bonds and more.
The best place to begin is in the office of a local professional stockbroker. In exchange for basic fees, a broker can create an account for you and provide advice. You’ll receive regular statements so you can see how your investments are changing. Look for a broker who is licensed and trained. Feel free to ask the broker directly.
Checking and savings accounts are very safe investments. Your money is available to you by check or cash withdrawal and the FDIC insures it for up to $250,000. Look into an Interest Checking account.
- Watch for teller (and other) fees as well as minimum deposit requirements that may be high. Look for competitive interest rates. Check with the different banks in your community to see what rates they offer.
- Avoid long-term use of credit cards. Credit cards are the most expensive type of loan available. Running up an amount that’s higher than what you can completely pay off in a month is a mistake.
Certificates of deposit (CDs) are a form of savings plan where you agree to give your money to the bank for a specific period (three months, six months, one year, five years, etc.). The bank agrees to pay you a specific amount of interest during this term. CDs are insured and the amount of money you make is guaranteed, but the bank will charge a fee if you withdraw the money before the end of the term. Like CDs, savings bonds have a fixed rate and are insured by the government. Check the current rate to see how they compare to CDs.
For many people, their first and largest investment is buying a home. Over time, homes increase in value an average of 4 percent per year.
Most beginning investors find that instead of selecting and following a number of individual stocks, they can get good growth by investing in mutual funds. These are large groups of stocks selected by a professional team of brokers. You invest in a large number of companies, and that reduces your risk. Because no-load or reduced-load mutual funds have lower fees, these will cost you less.
Stock Market Basics
- A company exists to create a product or service and to sell that product or service for a profit.
- To get the money to expand and develop more products, build factories and market their products, companies allow individuals to send them money in exchange for stocks. The stocks grant the buyers partial ownership in the company.
- A stock is your way to invest in a growing company—in exchange, you share in the growth (or loss) and in the profits, called dividends. If the company grows, you make money. If it fails, you can lose the amount that you invested.
By purchasing stock, you are becoming an owner of a company. If you select a company that has a great product, that can manufacture the product with quality and low costs, and that markets its products well and is able to get them to consumers, you are likely to make money. The value of the company and your stock will grow, and your share in the profits earns you dividends.
Blue Chip companies are the most established ones. They’ve been around for a long time and have recognizable names such as General Electric and Johnson & Johnson. Newer companies such as Facebook and Twitter have a much shorter history.
There are thousands of companies to choose from. Many people invest in companies that have products that they like. Your broker can give you information on the history and expected growth of any company that has stock. Newer companies are often very high risk. They fluctuate in value and may not be successful.
Bonds are direct loans of money to a company without ownership. They fluctuate in value but have a fixed rate of income. Many people feel that this is a safer form of investment than stocks, but it is not risk free. Ask your broker for more information.
Do It Yourself
When you’ve mastered the basics, you can move out on your own. Make sure you keep good records of your purchases and sales.