The Investment Process:
How to Begin
Just what is the stock market, and how do you begin investing in it? These are important questions, and many people are unclear about the answers. Understanding how stocks and bonds are traded, what an index is, and where to open a brokerage account will help you begin the investment process armed with your most valuable asset: knowledge.
The Stock Market
The stock market is the general term for the organized trading of stocks, and a stock exchange is a market for buying and selling stocks. The New York Stock Exchange is the largest stock exchange in the world. The National Association of Securities Dealers (NASDAQ) is also an important exchange.
Stock prices are determined by supply and demand – by sellers and buyers willing to buy or sell at a certain price. As demand goes up, the price rises, and when demand goes down, the price follows suit.
An index takes a sample of stocks and uses it to measure the market as a whole or by a specific industry. Three of the most common indexes are:
The Dow Jones Industrial Average (DJIA). The DJIA is comprised of 30 blue chip (well-established, financially sound companies) stocks.
The S&P 500. This index is owned by Standard & Poor's, and consists of 500 stocks chosen for such factors as market size, liquidity (the ability to convert an asset into cash quickly and penalty-free), and industry types.
The Wilshire 5000. This index tracks the performance of most publicly traded, U.S.-headquartered stocks available on the major exchanges.
As an investor, you can look to indexes to gauge how the stock market is doing. For example, if you hear reports that the DJIA is up, the larger companies are doing well, and so too should your stocks if you are invested in them. Following an index can help you make educated investment decisions.
So how do you actually begin? All you need is to open a brokerage account at a financial institution or brokerage house. As soon as you open your account, you can begin to buy and sell stocks and bonds – a process called trading. You can make trades with the assistance of a broker, over the phone, or online via the financial institution’s website. Whether you do it on your own or with help, you will be charged a fee for each trade you make.
Where you choose to open your account depends on how much assistance you need or want, and if you are willing to pay for it. You can open a brokerage account at:
Your financial institution. Many credit unions and banks sell investment products, and they may even have financial planners on staff who can provide guidance.
A traditional brokerage house. These companies provide a wide range of services. They staff professional money managers who can help you with very specific investment advice (for a fee). Traditional brokerage houses tend to have higher commissions than other options.
A discount brokerage house. If you want to invest without professional assistance, a discount broker may be the right company for you. You will be charged for making trades, but it will be considerably less than if you had an expert assist you. Commissions are even less if the company is Internet-based.
Research Before You Buy
Even if you trust your broker or advisor completely, it is important to do your own research before you purchase any security. After all, it is your money on the line – win or lose, the person or company who sells you the investment product earns a commission. Remember too, to have realistic expectations. Don’t take “hot” stock tips that promise a huge payout, particularly if you hear about it through an anonymous email!
The best place to begin your research is the Internet. Visit the company’s website and read all about it – including a history of its stock price, financial position, breaking news about products or services, and management. Whether you are buying stocks or bonds, it is important to know what you are getting into.
Investing is an exciting, and most often worthwhile venture. Will all of your investments pay off the way you want them to? Of course not. Even professionals lose money. Expect setbacks and keep learning – you’ll be on the road to riches before you know it.