What is the stock market? – How to Start Investing in the Stock Market for Beginners
All you need to know about Stock Market
Most people are familiar with the term “stock market,” but they may not be sure of its role in society.
The stock market is a large financial entity that in some way impacts everyone in a society, whether or not they actually have direct interaction with it.
While it can take years to fully understand all the components and implications of stock market activity, everyone should know the fundamental characteristics and purpose of the market.
The primary role of any stock market is to provide companies with access to large investor pools.
When a company chooses to “go public,” it sells ownership of the company to the public. In return for this sale, the company makes a considerable sum of money nearly overnight as investors buy “shares” in the corporate entity.
Selling shares on the open markets is often the only way to raise the significant amounts of capital necessary for large-scale manufacturing and the development of services that could affect millions of people.
Smaller companies with less capital cannot usually afford such a business model, so going public opens these doors. Even if you do not participate in the stock market, you likely drive a car or enjoy other products that were only possible through public capitalization.
Stock trading information
Most investors would be well-advised to build a diversified portfolio of stocks or stock index funds and hold on to it through good times and bad.
But investors who like a little more actively engage in stock trading. Stock trading involves buying and selling stocks frequently in an attempt to time the market.
The goal of stock traders is to capitalize on short-term market events to sell stocks for a profit or buy stocks at a low. Some stock traders are day traders, which mean they buy and sell several times throughout the day.
Others are simply active traders, placing a dozen or more trades per month.
Investors who trade stocks do extensive research, often devoting hours a day to following the market.
They rely on technical stock analysis, using tools to chart a stock’s movements in an attempt to find trading opportunities and trends. Many online brokers offer stock trading information, including analyst reports, stock research and charting tools.
Bull markets vs Bear markets
Neither is an animal you’d want to run into on a hike, but the market has picked the bear as the true symbol of fear: A bear market means stock prices are falling — thresholds vary, but generally to the tune of 20% or more — across several of the indexes referenced earlier.
Bull markets are followed by bear markets, and vice versa, with both, often signalling the start of larger economic patterns. In other words, a bull market typically means investors are confident, which indicates economic growth.
A bear market shows investors are pulling back, indicating the economy may do so as well.
The good news is that the average bull market far outlasts the average bear market, which is why over the long term you can grow your money by investing in stocks.
The S&P 500, which holds around 500 of the largest stocks in the U.S., has historically returned an average of around 7% annually when you factor in reinvested dividends and adjust for inflation.
That means if you invested $1,000 30 years ago, you could have around $7,600 today.
The different ways to invest in the stock market
- Individual stocks: You can invest in individual stocks if you have the time and desire to thoroughly research and evaluate stocks on an ongoing basis. If this is the case, we 100% encourage you to do so. It is entirely possible for a smart and patient investor to beat the market over time. On the other hand, if things like quarterly earnings reports and moderate mathematical calculations don’t sound appealing, there’s absolutely nothing wrong with taking a more passive approach.
- Index funds: In addition to buying individual stocks, you can choose to invest in index funds, which track a stock index like the S&P 500. When it comes to actively vs. passively managed funds, we generally prefer the latter. Index funds typically have significantly lower costs and are virtually guaranteed to match the long-term performance of their underlying indexes. Over time, the S&P 500 has produced total returns of about 10% annualized, and performance like this can build substantial wealth over time.
- Robo-advisors: Finally, another option that has exploded in popularity in recent years is the Robo-advisor. A Robo-advisor is a brokerage that essentially invests your money on your behalf in a portfolio of index funds that is appropriate for your age, risk tolerance, and investing goals. Not only can a Robo-advisor select your investments, but many will optimize your tax efficiency and make changes overtime automatically.