Everyone has heard of stocks, but many people don’t really understand what they are and how they work. April is Financial Literacy Month, and our website has lots of financial basics to get you in shape. Meanwhile, here’s what you should know about stocks:
1. In a Nutshell, a Share of Stock Represents Your Ownership in a Company.
As the company grows or decreases in value (or perceived value), your stock’s worth will go up or down.
2. There Are Two Main Ways to Make Money on Stocks.
The most basic way of making money on your stock is to buy your shares at one price and sell them for even more. You can also earn dividends, which are payments sometimes given to shareholders, a small percentage of a company's earnings.
3. Stocks Generally Come With High Risk (and Potential for High Reward).
Stocks are generally best when you’re young and have a long time to wait before you’ll need your money back (otherwise known as your time horizon). Since stocks are risky, they’re best when you have a long time to even out your gains and losses.
This is called diversifying your investments, which reduces your risk. Some stocks may be in the health care industry while others are in technology; some may be "large cap" while others are "small cap" (explanation of these terms). The important thing is not to put all of your eggs in one investment basket.
5. Investing With Funds May Be Safer Than Individual Stock-Picking.
Unless you’re a stock pro, we don’t recommend that you put large sums of money with individual stocks, since that increases your risk. After all, that one company could go bust! Instead, think about mutual funds and index funds, which is are ways to invest in lots of stocks at once. This is a great way to diversify your stock investments. That way, if one company fails, you still have loads of other companies in your portfolio. You still face risk—if, say, the stock market tumbles again—but it’s more mitigated than if you’d put your money just with one stock (Lehman Brothers, anyone?).
6. You Can Invest in Stocks Through Brokers or Funds.
If you decide to put your money directly into stocks, you can do so through your full-service or online discount brokerage. If you decide to invest in the stock market through a mutual fund, you can buy shares of the fund through your broker, as well.