What to know about stocks, how they work—and how to invest
Stowing away your money in a traditional savings account is a good way to build up a nice “just in case” fund, but it won’t give your money the chance to work double time 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 daunting if you’ve never done it before, but it can also be one of the best ways to make your money work for you. Here’s a rundown of everything you need to know about stocks and how you can start investing.
What are stocks?
Stocks are assets that represent ownership in a company.
Corporations issue stocks as a way for investors to own equity in their company. In exchange, these companies raise extra capital from selling shares to fund key projects or expand the business.
When the value of the company increases, so does the value of a stockholder’s shares, giving the investor the opportunity to build wealth as their investment portfolio grows. But it’s not always that seamless. 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 returned a historic annualized average return of around 11.88% since its 1957 inception through the end of 2021,” says 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 in accordance with different economic and stock market cycles.”
Understanding how stocks work
Stocks are purchased and sold on stock exchanges, which act as the intermediary between investors and companies. Stock exchanges facilitate transactions through which investors can buy and sell stocks, bonds, commodities, and other assets.
In the U.S., 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 buy shares of a company they believe will succeed. “[Stocks] give [investors] an alternative and fruitful way to support and benefit from public organizations they believe in,” says Michael Wang, CEO and founder at Prometheus Alternative Investments. “For some, this means investing in stocks of companies that align with their beliefs, such as strong ESG [environmental, social, and governance] efforts, or a specific cause the company works with.”
When a company does well, investors will receive profits in the form of dividends or capital gains. Dividends are periodic payments the company pays shareholders when it earns a profit. Capital gains are any profits that the stockholder earns from selling their shares at a higher price than they initially purchased them for.
What are the different kinds of stocks?
Not all stocks are built equally. They typically fall into one of two categories: common stocks and preferred stocks. They function similarly, but there are a few small differences:
- Voting rights: Common stockholders have the right to vote on matters related to company policies, board decisions, mergers, acquisitions, and more. Preferred stockholders aren’t usually given the same rights.
- Dividends: Both kinds of stocks pay dividends; however, preferred stocks typically pay shareholders fixed dividends, while common stocks fluctuate. And, if the company files for bankruptcy, preferred stockholders are paid higher dividends and paid before common stockholders.
How do I buy stocks?
The easiest way to invest in stocks is through an online brokerage account. This is an account offered by investment firms that you can put money into and use to start buying assets and building your portfolio.
Opening an account will require you to provide some personal information, like: your Social Security number, name, address, telephone 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 major factors to consider when choosing a brokerage account:
- Fees: Every brokerage account comes with a fee structure. You may be charged fees for receiving account statements, processing transactions, account maintenance, inactivity fees, and more. So before signing 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 most at the lowest cost.
- Account minimums: Certain accounts are free to open, and others require a minimum opening deposit in the thousands. Consider how much you’re ready to invest before choosing an account.
- Investment style: Being a more active or passive investor could 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 could cost you more in fees. If you’re looking to take a more-hands-off approach, you may want to consider having a robo-advisor automatically build and manage your portfolio. Others will let you sit in the driver’s seat and manage your own account and may be more affordable as a result.
“Investors should consider a wide variety of factors including, but not limited to, the history of the firm, the experience of the advisers, the technology and reporting infrastructure, the firm’s commitment to customer service, the types of products and solutions available, the insurance coverage, and the firm’s fee structure,” says Mahn.
After you’ve opened and funded your account, you’ll need to do some research on the companies you’re thinking of investing in.
“It’s key to look at the fundamentals of a company, [like] revenue and earnings growth and the track record and trustworthiness of the management team,” says Wang, “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’ll place a stock order. This tells your brokerage what you want to invest in, how many shares you’d like to purchase, and at what price. Some orders are executed immediately, others take a little longer depending on whether or not you’re 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 purchase stocks directly from a company, without using a broker, through a direct stock plan (DSP). This cuts out some of the costs you may incur by using a broker, but may require that you be employed by the company or already own stock 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 in 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 objectives in the case of dividend-paying stocks,” says Mahn. “However, investing in stocks comes with unique risks that should be reviewed and understood before contemplating any investments.”
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