The best way to build wealth is to have your money work for you, and one of the best ways to make your money work for you is to put it in the stock market. But the stock market can be a confusing place, and it’s more than understandable if you’re feeling a little intimidated. Let’s take a moment to demystify things and learn about more about how and why the stock market works–as well as how to make it work for you.
What are Stocks?
Let’s begin with the basics: what are stocks? Stocks are shares in a company. These shares aren’t exactly ownership shares (there are a few legal details the differentiate the two), but they’re similar in practice: the value of a company’s stock goes up as the company becomes more valuable and goes down as the company becomes less so. Companies offer stock to raise cash, swapping shares for money and then using that money to grow the company. If done right, everyone wins. The company grows and increases in value, while all the shareholders see their stocks rise in value along with it. Once the stocks are out there, people can trade them back and forth on stock exchanges. Savvy traders who sell stocks for more than they bought them for make money on the stock market.
Why Invest in Stocks?
It’s easy to see that smart traders can make money on the stock market. However, it’s also important to note that average folks can and should get into the market, provided they have the means. That’s because even a simple buy-and-hold strategy can mean big profits over the long-term.
Using your money to make money is key, because inflation robs our cash of its value over time. That’s why you want to earn interest with your money. A savings account is better than a checking account for this, but better still are stocks and other investment vehicles, which tend to outperform the interest offered by savings accounts. In fact, studies show you’ll have a hard time affording retirement if you don’t invest–so get on it!
Stock Investing 101
The simplest way to invest in the market is to invest broadly and regularly and to simply hold those investments until it’s time to retire and cash in. The reasoning behind this strategy is that the stock market tends to go up over time. Rather than trying to “time the market,” then, many investors choose to “buy and hold” for better or for worse. Over several decades, the market’s fluctuations become background noise in an overall upward trend. Investing this way is simple: you can get some diversity without having to buy lots of different stocks by simply targeting an index fund or other broad, low-risk fund. There are also target-date funds offered by major brokerages that hold a customized portfolio based on your expected retirement date.
Bigger and Better Strategies
Of course, some folks are ready for something a little more complex than buy-and-hold. And while a simple and diverse portfolio is always a good place to secure your retirement fund, there’s also something to taking a portion of your cash and trying to make money a little faster.
We don’t have the space here to describe every one of the many clever trading strategies that advanced investors make use of, but you can find plenty on the internet and in books on the subject. In fact, investing can become as involved and as complicated as you wish it to be. While the basics of investing are just that–basics–consider this introduction your gateway to as much further reading as you feel compelled to do.