Investing in the stock market isn't rocket science, but it is serious business. You can make money by investing in stocks, but you can lose money, too, so it's a good idea to do your background research before plopping down your hard-earned money on a hot tip you heard around the water cooler at work.
The primary way that most folks buy and sell stocks is through an investments broker. There are three main types of brokerage firms: full service, discount and online. The type that is right for you depends on your comfort level with making your own investment decisions. Full-service brokerage firms typically assign a specific representative to handle your account. They provide the greatest level of service but also charge the highest commissions. Discount brokers offer more limited service but at a cheaper price. Online brokerage firms are the least-expensive way to trade stocks, but you'll usually be responsible for doing your own research and making your own investment decisions.
There's no shortage of stock analysts who spend their time researching specific companies and industry sectors. Their job is to make wise recommendations regarding which stock to buy, which to sell and how long to hold. In some cases an analyst can be so influential that the market price of a stock might fall or rise on that analyst's recommendation, even if nothing about the company has changed, according to the U.S. Securities and Exchange Commission. But just because an analyst makes a recommendation, it's not sufficient reason for you to make an investment decision. Some analysts are better than others, not all analysts are scrupulous and some analysts might have a conflict of interest. The SEC recommends doing your own research to determine whether you agree with the analyst's conclusions before you buy or sell a stock.
Before you make your first stock investment, it's a good idea to determine how you feel about the risks involved. Investing in stocks is not even remotely like saving your money in the bank. There are no guarantees in the stock market, and you could lose some or all of your investment. Your ability to handle risk is commonly referred to as your investment temperament. If you don't mind rolling the dice, you probably have a low aversion to risk. If the thought of your stock prices dropping keeps you awake at night, you probably have a high aversion to risk. Knowing your investment temperament will help you choose stocks you can live with.
If you don't know where your target is, chances are you won't hit it. It's the same with investing in stocks. You need to know why you are investing, so you'll recognize when it's time to buy or sell to meet your investment objectives. For example, if you're interested in generating a steady stream of dividend income, you probably don't need to invest in the latest high-tech growth stock. If you're looking to make a quick buck on on a stock price run-up, you probably don't want to invest in a mature, blue-chip industrial stock.
Think Long Term
The stock market as a whole has consistently outperformed just about every other type of investment over long periods of time since the middle of the 20th century. The operative phrase is, "over long periods of time." The market will fluctuate. Sometimes it fluctuates down, and sometimes it fluctuates way down for a while, but if you take a long-term approach to your stock investments and are willing to hold them for 15 years or more, you stand a good change of earning strong, positive returns on your investment, according to the SEC's Investor.gov website.
- Securities and Exchange Commission: Analyzing Analyst Recommendations
- Financial Industry Regulatory Authority: Selecting Investment Professionals
- Investor.gov: Stocks
- Securities and Exchange Commission: Taking Stock
- Security Investor Protection Corporation: How SIPC Protects You
- MSN Money: Stocks Versus Other Investments
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.