Introduction to Investment in the Stock Market - dummies

Introduction to Investment in the Stock Market

By Paul Mladjenovic

The basics of stock investing are so elementary that few people recognize them. When you lose track of the basics, you lose track of why you invested to begin with.

  • Knowing the risk and volatility involved: Perhaps the most fundamental (and therefore most important) concept to grasp is the risk you face whenever you put your hard-earned money in an investment such as a stock.

    Related to risk is the concept of volatility: Volatility refers to a condition in which there is rapid movement in the price of a particular stock (or other investment); investors use this term especially when there’s a sudden drop in price in a relatively short period of time.

  • Assessing your financial situation: You need a firm awareness of your starting point and where you want to go.

  • Understanding approaches to investing: You want to approach investing in a way that works best for you.

  • Seeing what exchange-traded funds have to offer: Exchange-traded funds are like mutual funds, but they can be traded like stocks.

The bottom line in stock investing is that you shouldn’t immediately send your money to a brokerage account or go to a website and click “buy stock.” The first thing you should do is find out as much as you can about what stocks are and how to use them to achieve your wealth-building goals.

Before you continue, you should get straight exactly what a stock is. Stock is a type of security that indicates ownership in a corporation and represents a claim on a part of that corporation’s assets and earnings. The two primary types of stocks are common and preferred:

  • Common stock: Common stock entitles the owner to vote at shareholders’ meetings and receive any dividends that the company issues.

  • Preferred stock: Preferred stock doesn’t usually confer voting rights, but it does include some rights that exceed those of common stock. Preferred stockholders, for example, have priority in certain conditions, such as receiving dividends before common stockholders in the event that the corporation goes bankrupt. Additionally, preferred stock seeks to operate similarly to a bond for investors seeking stable income.

In addition to common stock, exchange-traded funds (ETFs) can be a valuable part of the stock investor’s portfolio. An exchange-traded fund is a fund with a fixed portfolio of stocks or other securities that tracks a particular index but is traded like a stock.