Jan 31, 2009
The stock market has sure been in the news a lot lately. When market prices drop, it may signal a good time for new investors to get in. But many folks may be intimidated at the idea of investing in and trading in the stock market because they've had little or no experience. Here are some basics to help you decide if this type of investment is right for you.
What are stocks exactly?
When you own a share of stock in a company, you actually become a part-owner! "Public corporations" raise money by selling these shares of ownership for the purposes of upgrading, expansion, or any other venture requiring capital.
How can I buy a stock and what does it get me?
Stocks can be purchased directly or by using a broker. Acquiring stock allows the owner to attend shareholder meetings, vote on issues, and receive an annual report which keeps the holder up to date on how the company is doing.
When a company is doing well, more people will want to own a piece of it which creates a higher demand. If you own stock in this company, the higher demand makes the value of your shares go up; conversely, if confidence in the business wanes, less people will want to invest in it and the value of your shares will go down.
How many and what kind of companies should I invest in?
There is no set number, of course, but the old adage proves true: don't put all your eggs in one basket. There are no guarantees in the stock market, but "blue chip" companies are stable, longstanding businesses that may offer the safest (though not necessarily the largest) returns on your investment.
It is a good idea to shift your stocks around every now and then so that a large portion of your investment income is not dependent on one or two successful companies. Remember, stock values go up and down, and you want to avoid getting stung by keeping your investments balanced. One rule is to sell off half of your shares in a company when its value doubles, then take that money and reinvest it elsewhere.
When should I sell?
This is a tough question because there is no set answer. A lot depends on what your investment goals are, how many risks you are willing to take, and how long you plan to stay in the stock market. The rule in the above section is a good one to follow, but it's essential to never sell without having a strategy in mind. This is when an experienced broker can help, and you may want to consider working with one if you plan to become a serious investor.
It is never too late in life to try your hand at investing in the stock market. It is essential, however, to do your homework and learn all about it before taking the plunge.